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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549-1004
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2004
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 No. 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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(IRS employer identification number) |
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5725 Delphi Drive, Troy, Michigan
(Address of principal executive offices) |
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48098
(Zip code) |
Registrant’s telephone number, including area code
(248) 813-2000
Securities registered pursuant to
Section 12 (b) of the Act:
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Name of Each Exchange |
| Title of Each Class |
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on Which Registered |
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Common Stock, $0.01 par value per share
(including the associated Preferred Share Purchase Rights) |
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New York Stock Exchange |
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61/2% senior
notes due May 1, 2009
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New York Stock Exchange |
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71/8% debentures
due May 1, 2029
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New York Stock Exchange |
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81/4%
Cumulative Trust Preferred Stock of Delphi Trust I
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New York Stock Exchange |
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 and 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. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
As of June 30, 2004, 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
$6.0 billion. The closing price of the Common Stock on
June 30, 2004 as reported on the New York Stock Exchange
was $10.68 per share. As of June 30, 2004, the number
of shares outstanding of the registrant’s Common Stock was
561,192,179 shares.
The number of shares outstanding of the registrant’s common
stock, $0.01 par value per share as of May 31, 2005
was 561,418,059.
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
2
PART I
DELPHI CORPORATION
ITEM 1. BUSINESS
Overview. Delphi Corporation (“Delphi”
or the “Company”) is a leading global supplier of
vehicle electronics, transportation components, integrated
systems and modules and other electronic technology. Delphi
technologies are present in more than 75 million vehicles
on the road worldwide as well as in communication, computer,
consumer electronic, energy and medical applications.
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 2004, 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. |
Ongoing SEC Investigation
Delphi is the subject of an ongoing investigation by the Staff
of the Securities Exchange Commission (“SEC”) and
other federal authorities involving Delphi’s accounting for
and disclosure of a number of transactions. The transactions
include rebates or other lump-sum payments received from
suppliers, certain off-balance sheet financings of indirect
materials and inventory, and the payment in 2000 of
$237 million in cash, and the subsequent receipt in 2001 of
$85 million in credits, as a result of certain settlements
between Delphi and its former parent company, General Motors.
Delphi’s Audit Committee has completed its internal
investigation of these transactions and concluded that many were
accounted for improperly. The financial information presented in
this Annual Report on Form 10-K reflects the corrections to
Delphi’s originally issued financial statements resulting
from the Audit Committee’s investigation.
Contemporaneously with the filing of this Annual Report on
Form 10-K, Delphi has filed amended Quarterly Reports on
Form 10-Q/ A for the quarters ended March 31, 2004 and
June 30, 2004 that include restated financial statements.
Delphi has also filed its Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004 that includes
financial statements that differ from those included in
Delphi’s Report on Form 8-K dated October 18,
2004. Delphi expects to file its Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005 on or
before June 30, 2005 and thus to become current in its
filings of periodic reports with the SEC.
As previously disclosed in a Form 8-K filing on
June 9, 2005, the results of the investigation also
concluded that Delphi had inaccurately disclosed to credit
ratings agencies, analysts and the Board of Directors the amount
of sales of accounts receivable from 1999 until year-end 2004.
Subsequent to that filing, we also determined that our
disclosure of operating cash flow measured on a non-GAAP basis
as set forth in our earnings releases for the first and second
quarters of 2003 were inaccurate. Specifically, we overstated
this measure of operating cash flow by $30 million in the
first quarter of 2003 and understated the measure by the same
amount in the second quarter of 2003. The Company has enhanced
the
3
disclosure in the Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(“MD&A”) — Liquidity and Capital
Resources section of this Form 10-K to clarify the extent
to which the Company uses factoring facilities as a source of
liquidity.
Delphi is fully cooperating with the SEC’s ongoing
investigation and requests for information as well as the
related investigation being conducted by the Department of
Justice. The Company has entered into an agreement with the SEC
to suspend the running of the applicable statute of limitations
until April 6, 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.
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:
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 sensors and
in-vehicle entertainment are making steady inroads into the
transportation industry.
Global Capabilities of Suppliers. In order to
serve multiple markets in a more cost-effective manner, many VMs
are turning to global vehicle platforms such as “world
cars,” 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.
Optimizing Supply Chain Value Stream. In order to
continue to respond to increasingly competitive market pricing
dynamics, suppliers are establishing comprehensive plans to
remove waste from the enterprise value stream. This includes
optimizing the flow of information between the VM, the
Tier 1 supplier (a supplier which sells directly to a VM),
and other tiers of the supply chain. Value stream efficiencies
are also increasingly being achieved through earlier
collaboration between VMs and suppliers in the advanced product
design, engineering and manufacturing phases of the product
delivery cycle. Additional benefits are also being realized due
to greater collaboration between Tier 1 and lower tier
suppliers on product design, material selection, manufacturing,
processing, and product packaging. Many of these efficiencies
are enabled by internet based supply chain management tools,
computerized modeling and computerized product design software
tools.
Increased Emphasis on Systems and Modules
Sourcing. To simplify the vehicle design and assembly
processes and reduce their 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 VM’s assembly line
and then provide local assembly of systems and modules.
4
Ongoing Industry Consolidation. 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 impacts customer/supplier relationships and
provides opportunities and risks as suppliers attempt to secure
global supply contracts across broader vehicle platforms.
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. VM’s 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.
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, 2004, we employed approximately 17,000
engineers, scientists and technicians around the world with over
one-third focused on electronic and high technology products,
including software algorithm development. We introduced
approximately 322 new products and processes in 2004, a 29%
increase over 2003. 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. We have aggressively
managed costs in other portions of our business, such as
material cost, manufacturing cost and selling, general and
administrative costs, in order to maintain our total
expenditures for research and development activities (including
engineering). Total expenditures for research and development
activities (including engineering) are approximately
$2.1 billion for the year ended December 31, 2004,
$2.0 billion for the year ended December 31, 2003, and
$1.9 billion for the year ended December 31, 2002.
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 are critical to supporting continued
technological innovation. 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.
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
5
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 2004, our product offerings were organized in two product
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, 2004 are described
below.
Dynamics, Propulsion, Thermal & Interior.
Our Dynamics, Propulsion, Thermal & Interior product
sector accounted for $13.3 billion of our 2004 sales (46.3%
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, reduced mass and improved fuel
efficiency. In addition, the sector offers complete thermal
management products including powertrain cooling and climate
control systems. These systems provide 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, NSK Ltd.,
Siemens AG, Continental Teves, TRW Automotive, 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 (I2C)
and Accelerometer-Pilot Control (APC); sensors and actuators
which provide essential data and control for integrated vehicle
systems; air/fuel management subsystems; exhaust emission
systems; batteries/energy storage products; valve train systems;
ignition products; fuel handling systems and evaporative
emissions canisters; vehicle stability control systems;
controlled suspension systems such as MAGNERIDE™
Ride & Handling System; dynamic body control systems;
suspension and brake components; steering systems including
high-efficiency power steering systems, and magnetic assist
steering systems; steering columns; hydraulic steering
components; driveline systems; heating, ventilation and air
conditioning (HVAC) 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 the
manufacturer. This sector is also developing solid oxide fuel
cell technology.
Electrical, Electronics & Safety. Our
Electrical, Electronics & Safety product sector
accounted for $13.5 billion of our 2004 sales (47.2%
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,
6
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 growing 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., Motorola Inc., Siemens 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 which
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, batteries, 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 MyFi, Delphi XM SKYFi2 and Delphi XM
Roady2 satellite radio receivers and Roady2 Personal Audio
System, and a variety of accessories for home, vehicle, and
portable use; and Delphi rear-seat entertainment systems all for
the consumer market.
Automotive Holdings Group. Our Automotive Holdings
Group (“AHG”) accounted for $1.9 billion of our
2004 sales (6.5% excluding inter-sector sales). AHG is comprised
of select plant sites and product lines that do not meet our
targets for net income or other financial metrics. AHG enables
consistent and targeted management focus on finding solutions
for these businesses and sites. By bringing a separate reporting
structure for the AHG, we have created a better environment for
change. We have increased transparency, accountability, focus
and the level of urgency. AHG fosters an entrepreneurial
approach where there are no “one size fits all”
solutions and all the key stakeholders, customers, unions,
employees, suppliers and communities alike are being engaged to
help resolve issues. Our principal AHG product lines include:
halfshafts, batteries, filters, spark plugs, generators and
compressors. We originally had twelve plant sites included in
the AHG. One site was closed in 2003, one site was consolidated
and one site ceased operations in 2004. In addition, we have
ceased manufacturing operations at the Olathe, Kansas and
Anaheim, California sites in the first quarter of 2005. On
December 10, 2004, Delphi announced that effective
January 1, 2005, we are moving three additional
manufacturing operations to AHG to accelerate efforts to bring
these sites back to profitability or resolve issues at these
operations through other actions. The additional operations
named to Delphi’s AHG include: Laurel, Mississippi;
Kettering, Ohio; and Home Avenue/ Vandalia, Ohio. The total
revenue for these three sites in 2004 was approximately
$460 million.
Customers
We primarily sell our products and services to the major global
VMs. As a percentage of sales, our non-GM sales were 46% in
2004. While our business with customers other than GM, including
sales to other Tier I suppliers that supply GM, has
increased since our separation from GM in 1999 (the
“Separation”), and we expect such business to continue
to increase over time, we also expect that GM will remain our
largest customer for a significant period of time due to the
long-term nature of sales contracts in our industry and our
strong customer-supplier relationship with GM. Our sales to GM
continue to decline, principally reflecting the impact of
customer trends, the exit of some businesses, changes in GM
vehicle content and the product mix supplied to them, as well as
GM’s diversification of
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its supply base. 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 the impact will likely vary by
region. We continue to project our sales beyond 2004 to grow
modestly with non-GM sales increasing, particularly in Europe
and Asia Pacific and GM sales likely decreasing, particularly in
North America, assuming projected production levels, consistency
of current market trends and our ability to exit businesses as
planned.
We currently supply parts to each regional sector of GM’s
Automotive Operations, including its automotive operations in
the United States (“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”).
The following table shows this breakdown of our total net sales
for each of the last three years.
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Total Net Sales | |
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Year Ended December 31, | |
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2004 | |
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2003 | |
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2002 | |
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| Customer |
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$ | |
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% | |
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$ | |
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% | |
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$ | |
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% | |
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(As Restated | |
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(As Restated | |
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See Note 2) | |
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See Note 2) | |
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(dollars in millions) | |
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GM-North America
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$ |
12,706 |
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44.4 |
% |
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$ |
14,360 |
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51.2 |
% |
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$ |
15,506 |
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56.1 |
% |
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GM-International
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1,788 |
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6.3 |
% |
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1,705 |
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6.1 |
% |
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1,452 |
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5.3 |
% |
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GM-SPO
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923 |
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3.2 |
% |
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964 |
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3.4 |
% |
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1,136 |
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4.1 |
% |
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Total GM
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15,417 |
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53.9 |
% |
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17,029 |
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60.7 |
% |
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18,094 |
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65.5 |
% |
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Other customers
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13,205 |
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46.1 |
% |
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11,048 |
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39.3 |
% |
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9,547 |
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34.5 |
% |
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Total net sales
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$ |
28,622 |
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100.0 |
% |
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$ |
28,077 |
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|
100.0 |
% |
|
$ |
27,641 |
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100.0 |
% |
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Included in sales to other customers in the foregoing table are
sales to each of the major global VMs other than GM. Sales to
four of these other major global VMs exceeded $850 million
in 2004 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, 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 over 5,000 Independent Aftermarket customers including our
Consumer Electronics customers such as Wal-Mart, Best Buy, and
Circuit City. 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 2004, sales to our Independent Aftermarket, including
Consumer Electronics that are sold through retail channels,
Commercial Vehicle and New Markets customers were
$2,264 million as compared to $1,688 million for 2003.
Additional information regarding net sales by customer and
geographic area and net property by geographic area is included
in Note 17 Segment Reporting to the consolidated financial
statements.
8
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 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 one week in December. In addition, third quarter automotive
production is traditionally lower as new models enter
production. 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
platinum group metals, copper, aluminum, steel, lead and resins.
All of these raw materials, except the platinum group metals,
which we use primarily to produce our catalytic converters, 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 2004, we were challenged by commodity cost increases,
most notably steel and petroleum-based resin products. We
continue to proactively work with our suppliers 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 2004. We expect commodity cost
pressures will continue to intensify as our supply contracts
expire during 2005. We will seek to manage these cost pressures
using a combination of techniques including working with our
suppliers to mitigate costs, seeking alternative product designs
and material specifications, combining our purchase requirements
with our customers, 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 earnings in future periods may be adversely
impacted.
Environmental Compliance
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.
The Company has an environmental management structure designed
to facilitate and support its compliance with these requirements
globally. Although it is the Company’s intent to comply
with all such requirements and regulations, it cannot provide
assurance that it is at all times in compliance. Delphi has made
and will continue to make capital and other expenditures to
comply with environmental requirements. The amount of such
expenditures was not material during the past three years and
Delphi does not expect such expenditures to be material in 2005.
Environmental requirements are complex, change frequently and
have tended to become more stringent over time. Accordingly,
Delphi cannot provide assurance that these requirements will not
change or become more stringent in the future.
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
9
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 Tremont 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. It has included an
estimate of the Company’s share of the potential costs 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 make material future expenditures for remediation,
possibly over an extended period of time and possibly in excess
of its existing reserves. The Company will continue to re-assess
any potential remediation costs and, as appropriate, its overall
environmental reserves as the investigation proceeds. Delphi may
be named as a PRP at other sites in the future, including with
respect to divested and acquired businesses.
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 generally accepted
accounting principles. As of December 31, 2004, our reserve
for such environmental investigation and cleanup was
approximately $29 million, 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.
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 concerns. Upon our selection of a qualified
buyer, existing contracts with GM relating to the business being
sold may be assigned to the buyer upon GM’s consent, which
will not be unreasonably withheld.
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
applicable supply contracts. Consistent with GM’s contracts
with other suppliers, on a case by case basis, GM may terminate
a supply contract (including supply contracts in place prior to
the Separation) 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, in some cases, termination for convenience. However, except
with respect to annual purchase orders, where GM is exercising
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” for non-competitive pricing or exercise
its right to terminate for convenience during the first
18 months of the contract. With respect to long-term
contracts signed after October 1, 2003, GM has
10
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. Termination of a majority of our supply contracts with
GM would likely have a material adverse effect on our company.
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 until three years after such service parts
go “past model.” The term “past model”
refers to parts which are used on vehicle models which are no
longer in production. Thereafter, unit prices for such service
parts will be negotiated between the parties.
Aftermarket Sales. Through December 31, 2003,
aftermarket sales in the U.S. were covered by a Memorandum
of Understanding (“MOU”) 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 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, throughout 2004, we have been
negotiating with GM-SPO standard GM purchase order terms for
those products that GM wants to continue to source from Delphi.
We do not believe the expiration of the Aftermarket Supply
Agreements has 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 International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America (“UAW”)
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 on under this guarantee. Our indemnification
obligations remain in effect until October 18, 2007. As a
means of mitigating the risk that the guarantee will be called
upon, we have also agreed until October 18, 2007 to consult
with GM before taking certain fundamental corporate actions and
obtain GM’s consent (not to be unreasonably withheld)
before entering into transactions which might significantly
adversely affect our ability to meet our pension and
postretirement benefits by causing our credit rating to be
downgraded below B1 from Moody’s or B+ from
Standard & Poors. Delphi has not taken any corporate
actions meeting this definition. Nevertheless, we are currently
rated B3 by Moody’s and B- by Standard & Poors.
Flowback Rights. Certain of our hourly 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 our company 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 postretirement benefit
(“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 that transfer between our company and
GM.
11
Employees — Union Representation
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. On a comparable
basis, as of December 31, 2003, we employed approximately
190,000 people, of whom approximately 37,000 were salaried
employees and approximately 153,000 were hourly employees. Of
our hourly employees as of December 31, 2004, approximately
110,600 or 74.8% are represented by approximately 55 unions,
including UAW; Industrial Division of the Communication Workers
of America, AFL-CIO, CLC (“IUE-CWA”); the United Steel
Workers (“USWA”); and Confederacion De Trabajadores
Mexicanos (“CTM”). As of December 31, 2004,
approximately 25,200 hourly employees were represented by
the UAW, approximately 8,400 by the IUE-CWA and approximately
1,100 by the USWA.
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 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, 2004, actual employment levels at certain
sites were below the specified employment levels.
In April 2004, we finalized a seven-year Supplement to the UAW
National Labor agreement with the UAW. The Supplement sets new
wage and benefit levels for future hires. Given the current
automotive production environment in the U.S., specifically at
GM North America, we do not currently anticipate hiring any
meaningful number of U.S. hourly employees under the terms
of the supplement for the foreseeable future. With regard to
benefits, a cash balance pension plan and credit balance retiree
medical plan provide solid protection for employees in
retirement while alleviating financial pressure on the balance
sheet. The healthcare plan for new employees provides important
benefits with cost-sharing more in line with industry
competition.
ITEM 2. PROPERTIES
Our world headquarters campus is located in Troy, Michigan. As
of December 31, 2004, we occupied this facility, as well as
certain other facilities, under lease agreements. Regional
headquarters are also maintained in Tokyo, Japan; Paris, France;
and São Paulo, Brazil. Excluding our joint ventures and
other investments, as of December 31, 2004, we maintained
335 sites in 40 countries throughout the world, including 171
manufacturing facilities, 33 technical centers, and 52 customer
centers and sales offices. Of the 335 sites, 49 were owned and
49 were leased in the United States and Canada, 39 were owned
and 12 were leased in Mexico, 78 were owned and 53 were leased
in Europe/ Middle East/ Africa, 11 were owned and 5 were leased
in South America and 13 were owned and 26 were leased in Asia/
Pacific.
We are continuously evaluating plans for effective worldwide
engineering and technical centers to provide a customer-focused
engineering support network. We believe these efforts will
continue to enhance the engineering and technical support
provided to our customers around the world, while controlling
associated operating costs.
We believe that our facilities are suitable and adequate, and
have sufficient productive capacity to meet our current
anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
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
12
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 or may not face
an increased risk of product liability suits as plaintiffs
become more aware of the Company’s independent existence
from GM and it becomes more visible to the end-consumer of its
products.
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. Traditionally, 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. VMs are increasingly requiring their outside suppliers
to bear these costs. Depending on the terms under which Delphi
supplies products to a VM, a VM might seek to hold Delphi
responsible for some or all of the repair or replacement costs
of such products under new vehicle warranties, when the product
supplied did not perform as represented. VMs (including GM) are
increasingly vigorous in pursuing warranty claims. In
particular, as previously disclosed, during the third quarter of
2003, Delphi resolved known pre-separation warranty claims and
most outstanding pricing and sourcing disputes with GM. GM may
assert additional pre-separation claims in the future. The
Company does not know of, nor has GM communicated to Delphi, any
outstanding pre-separation warranty, pricing or sourcing
disputes between the companies at this time. Although it 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 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 enforce and defend the Company’s
intellectual property and face 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, the Company has been mediating a number of patent
disputes regarding vehicle occupant detection technologies with
Takata Corporation and its subsidiaries. On December 1,
2004, the parties resolved these disputes to their mutual
satisfaction by entering into a cross-license agreement
concerning various patents in the field of vehicle occupant
detection technologies.
13
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.
Shareholder Lawsuits
Subsequent to the Company’s announcement of its intention
to restate originally issued financial restatements, several
purported class-action lawsuits have been filed against the
Company, several of Delphi’s subsidiaries, certain current
and former directors and officers of Delphi, General Motors
Investment Management Corporation (the named fiduciary for
investment purposes and investment manager to Delphi’s
employee benefit plans), and several current and former
employees of Delphi or Delphi’s subsidiaries. The lawsuits
fall into three categories.
One group has been brought under the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”),
purportedly on behalf of participants in certain of the
Company’s and its subsidiaries’ defined contribution
employee benefit pension plans who invested in the Delphi
Corporation Common Stock Fund. Plaintiffs allege that the plans
suffered losses due to the defendants’ breaches of
fiduciary duties under ERISA. To date, the Company has received
service in five such lawsuits and is aware of an additional
eleven that are pending. All pending cases have been filed in
U.S. District Court for the Eastern District of Michigan.
The second group of purported class action lawsuits variously
alleges that the Company and certain of its current and former
directors and officers made materially false and misleading
statements in violation of federal securities laws. To date, the
Company has been served in six such lawsuits and is aware of
eight additional lawsuits. The lawsuits have been filed in the
U.S. District Court for the Eastern District of Michigan,
the U.S. District Court for the Southern District of New
York, and the U.S. District Court for the Southern District
of Florida.
The third group of lawsuits pertains to two shareholder
derivative cases and a demand. To date, certain current and
former directors and officers have been named in two such
lawsuits. One has been served in Oakland County Circuit Court in
Pontiac, Michigan, and a second is pending in the
U.S. District Court for the Southern District of New York.
In addition, the Company has received a demand letter from a
shareholder requesting that the Company consider bringing a
derivative action against certain current and former officers.
The derivative lawsuits and the request demand the Company
consider further derivative action premised on allegations that
certain current and former officers made materially false and
misleading statements in violation of federal securities laws.
The Company has appointed a special committee of the Board of
Directors to consider the demand request.
Due to the preliminary nature of these cases, the Company is not
able to predict with certainty the outcome of this litigation or
its potential exposure related thereto. Although Delphi believes
that any loss that the Company would suffer under such lawsuits
should, after payment of a $10 million deductible, be
covered by its director and officer insurance policy, it cannot
assure you that the impact of any loss not covered by insurance
or applicable reserves would not be material. Delphi has
recorded a reserve related to these lawsuits equal to the amount
of its insurance deductible.
Regulatory Actions and Other Matters
As previously reported, Delphi is the subject of an ongoing
investigation by the SEC and other federal authorities involving
Delphi’s accounting and adequacy of disclosure for a number
of transactions. Delphi is fully cooperating with the SEC’s
ongoing investigation and requests for information as well as
the related investigation being conducted by the Department of
Justice. The Company has entered into an agreement with the SEC
to suspend the running of the applicable statute of limitations
until April 6, 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.
14
Management concluded that Delphi’s controls over financial
reporting and disclosure procedures were ineffective. Delphi has
undertaken and is continuing to take actions to address material
weaknesses on its internal controls over financial reporting and
the deficiencies in its disclosure controls and procedures. For
more detail on the weaknesses and deficiencies identified and
remedial actions see Part II, Item 9A. Controls and
Procedures. Delphi’s failure to timely and effectively
remediate its control weaknesses and deficiencies may have a
material adverse affect on its business.
The Company also believes that the Enforcement Division of the
SEC has taken a more proactive role, what it refers to as a
“risk based” approach, by seeking information from
issuers in an effort to assess issuer 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
postretirement benefit plans is an example of this practice.
While the Company intends to continue fully cooperating with the
SEC’s informal inquiry in this matter and in any other
similar inquiry, Delphi’s costs of compliance may be
impacted.
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, see “Environmental Compliance.”
|
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| 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.
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|
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS AND STRATEGY
BOARD MEMBERS OF THE REGISTRANT |
Executive Officers
The name, age and position as of January 1, 2005 of each of
the executive officers of Delphi 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 |
| |
|
| |
|
|
|
J. T. Battenberg III
|
|
|
61 |
|
|
Chairman of the Board, Chief Executive Officer &
President |
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Alan S. Dawes
|
|
|
50 |
|
|
Director, Vice Chairman & Chief Financial Officer |
|
Donald L. Runkle
|
|
|
59 |
|
|
Director, Vice Chairman, Enterprise Technologies |
|
Rodney O’Neal
|
|
|
51 |
|
|
President, Dynamics, Propulsion, Thermal & Interior
Sector |
|
Mark R. Weber
|
|
|
56 |
|
|
Executive Vice President, Operations, Human Resource Management
and Corporate Affairs |
|
David B. Wohleen
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|
|
54 |
|
|
President, Electrical, Electronics & Safety Sector |
On January 7, 2005, we announced changes in our management
structure, including the appointment of Rodney O’Neal as
president and chief operating officer and David Wohleen as
vice-chairman. In addition, we announced the planned retirement
of Donald Runkle, vice-chairman, enterprise technologies, who
will be retiring effective July 1, 2005. These appointments
and changes were effective as of January 7, 2005.
On March 4, 2005, we announced the resignation, effective
March 4, 2005, of the Company’s vice chairman and
chief financial officer, Alan S. Dawes. Mr. Dawes also
resigned from Delphi’s Board of Directors. John D. Sheehan,
the current chief accounting officer and controller of the
Company was appointed to the additional position of acting chief
financial officer. The Board is conducting an internal and
external search for Mr. Dawes’ successor.
15
On June 23, 2005, we announced that effective July 1,
2005, J. T. Battenberg III will be retiring from the
Company. His successor will be Robert S. Miller. Mr. Miller
will succeed Mr. Battenberg as chairman and chief executive
officer of Delphi when Mr. Battenberg retires on
July 1, 2005. Mr. Miller was the non-executive
chairman of Federal-Mogul, and also serves as a director of four
other diverse public companies, including Waste Management,
Inc., Symantec Corporation, United Airlines and RJ Reynolds
Tobacco Holdings.
As of the date of this filing, the name, age, position and a
description of the business experience of each of the executive
officers of Delphi is listed below. There is 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 |
| |
|
| |
|
|
|
J. T. Battenberg III
|
|
|
62 |
|
|
Chairman of the Board & Chief Executive Officer |
|
Rodney O’Neal
|
|
|
51 |
|
|
Director, President & Chief Operating Officer |
|
David B. Wohleen
|
|
|
55 |
|
|
Vice Chairman |
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Mark R. Weber
|
|
|
57 |
|
|
Executive Vice President, Operations, Human Resource Management
and Corporate Affairs |
|
John D. Sheehan
|
|
|
44 |
|
|
Acting Chief Financial Officer, Chief Accounting Officer and
Controller |
Mr. Battenberg has led Delphi and its predecessor,
the GM Automotive Components Group Worldwide (“ACG
Worldwide”) since 1992. He is a member of the Board of
Directors of Sara Lee Corporation. Mr. Battenberg is on the
Board of Trustees of Kettering University, Columbia University
Business School and the National Advisory Board for
J.P. Morgan Chase & Co. He is also a member of the
Business Roundtable and Chairman of its Fiscal Policy Task
Force, the Business Council Executive Committee, the Group of
100, the Economic Club of Detroit, and FIRST (For Inspiration
and Recognition of Science and Technology).
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 is 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.
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
16
for Delphi since January 1995. He is the executive champion for
Delphi’s Harley-Davidson Customer Team.
Mr. Sheehan, the current chief accounting officer
and controller of Delphi Corporation, was appointed to the
additional position of acting chief financial officer effective
March 4, 2005. 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 United States, England, and Germany.
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, of this
report.
17
PART II
|
|
| ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our Common Stock is listed on the New York Stock Exchange under
the symbol “DPH.” The Transfer Agent and Registrar for
our Common Stock is The Bank of New York. On December 31,
2004 and May 31, 2005, there were 310,599 and 301,288
holders of record, respectively, of our Common Stock.
We declared dividends of $0.07 per share on March 1,
June 22, September 9, and December 8, 2004, and
on March 26, June 18, September 3, and
December 3, 2003. We declared a dividend of $0.03 per
share on March 23, 2005. Our Board is free to change its
dividend practices at any time and to decrease or increase the
dividend paid, or not to pay a dividend, on our Common Stock on
the basis of the results of operations, financial condition,
cash requirements and future prospects of our company and other
factors deemed relevant by our Board.
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 last two years. Please see Note 16 Stock
Incentive Plans to the consolidated financial statements for
additional information regarding equity compensation plans.
| |
|
|
|
|
|
|
|
|
| |
|
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 |
|
| |
|
|
|
|
|
|
|
|
| |
|
Price Range of | |
| |
|
Common Stock | |
| |
|
| |
| Year Ended December 31, 2003 |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
4th Quarter
|
|
$ |
10.30 |
|
|
$ |
8.10 |
|
|
3rd Quarter
|
|
$ |
9.76 |
|
|
$ |
7.85 |
|
|
2nd Quarter
|
|
$ |
9.92 |
|
|
$ |
6.70 |
|
|
1st Quarter
|
|
$ |
9.40 |
|
|
$ |
6.39 |
|
|
|
|
Purchase of Equity Securities by the Issuer and Affiliated
Purchasers |
The following table sets forth, for each of the months
indicated, the total number of shares purchased by Delphi or on
our behalf by any affiliated purchaser, the average price paid
per share, the number of shares purchased as part of a publicly
announced repurchase plan or program, and the maximum number of
shares or approximate dollar value that may yet be purchased
under the plans or programs.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Maximum Number | |
| |
|
|
|
|
|
Total Number of Shares | |
|
of Shares that may | |
| |
|
Total Number | |
|
Average | |
|
Purchased as Part of | |
|
yet be Purchased | |
| |
|
of Shares | |
|
Price Paid | |
|
Publicly Announced | |
|
Under the Plans or | |
| Period |
|
Purchased | |
|
Per Share | |
|
Plans or Programs(a) | |
|
Programs(a) | |
| |
|
| |
|
| |
|
| |
|
| |
|
October 1, 2004 through October 31, 2004
|
|
|
988,575 |
(b) |
|
$ |
8.31 |
|
|
|
— |
|
|
|
19,000,000 |
|
|
November 1, 2004 through November 30, 2004
|
|
|
N/A |
|
|
|
N/A |
|
|
|
— |
|
|
|
19,000,000 |
|
|
December 1, 2004 through December 31, 2004
|
|
|
372,853 |
(b) |
|
$ |
8.42 |
|
|
|
— |
|
|
|
19,000,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,361,428 |
|
|
$ |
8.34 |
|
|
|
— |
|
|
|
19,000,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
(a) |
|
As part of Delphi’s stock repurchase program in January of
2004, 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 2005 to fund obligations for our
stock options and other awards issued under its equity based
compensation plan. To date no repurchases have been made
pursuant to that plan. |
| |
|
(b) |
|
Primarily includes open-market purchases by the trustee of
Delphi’s 401(k) plans to fund investments by employees in
our common stock, one of the investment options available under
such plans. Also includes minimal shares of common stock that
were withheld to satisfy the company’s tax withholding
obligations arising upon vesting of restricted stock units
issued pursuant to the company’s equity based compensation
plan. |
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data reflects the results of
operations and balance sheet data for the years ended 2000 to
2004. The data below should be read in conjunction with, and is
qualified by reference to “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and the consolidated financial statements and notes thereto
included elsewhere in this report. The financial information
presented may not be indicative of our future performance.
The following selected consolidated financial data for 2003,
2002, 2001 and 2000 has been restated to reflect adjustments
resulting from matters discussed in Item 7,
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (“MD&A”) and, with
respect to the three years ended December 31, 2004, in
Note 2, Restatement, to our consolidated financial
statements included elsewhere in this Report on Form 10-K.
We encourage you to read the MD&A and Note 2
Restatement to our consolidated financial statements for further
discussion of the restatement adjustments.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
(As Restated | |
|
(As Restated | |
|
(As Restated | |
|
(As Restated | |
| |
|
|
|
See Note 2) | |
|
See Note 2) | |
|
See Note 2) | |
|
See Note 2) | |
| |
|
(in millions, except per share amounts) | |
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales
|
|
$ |
28,622 |
|
|
$ |
28,077 |
|
|
$ |
27,641 |
|
|
$ |
26,302 |
|
|
$ |
29,224 |
|
| |
Net (loss) income(1)(2)
|
|
$ |
(4,753 |
) |
|
$ |
(10 |
) |
|
$ |
318 |
|
|
$ |
(428 |
) |
|
$ |
817 |
|
| |
Basic (loss) earnings per share
|
|
$ |
(8.47 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.57 |
|
|
$ |
(0.76 |
) |
|
$ |
1.46 |
|
| |
Diluted (loss) earnings per share
|
|
$ |
(8.47 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.57 |
|
|
$ |
(0.76 |
) |
|
$ |
1.45 |
|
| |
Cash dividends declared per share
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
| |
Ratio of earnings to fixed charges(3)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
2.6 |
|
|
|
N/A |
|
|
|
5.7 |
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total assets
|
|
$ |
16,593 |
|
|
$ |
21,066 |
|
|
$ |
19,692 |
|
|
$ |
18,928 |
|
|
$ |
18,986 |
|
| |
Total debt
|
|
|
2,980 |
|
|
|
3,456 |
|
|
|
3,215 |
|
|
|
3,629 |
|
|
|
3,677 |
|
| |
Stockholders’ (deficit) equity
|
|
|
(3,539 |
) |
|
|
1,446 |
|
|
|
1,232 |
|
|
|
2,267 |
|
|
|
3,676 |
|
|
|
| (1) |
Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142 “Goodwill and
Other Intangible Assets” and no longer amortize purchased
goodwill. |
| |
| (2) |
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 6,
Income Taxes, to our consolidated financial statements included
elsewhere in this report on Form 10-K. |
| |
| (3) |
Fixed charges exceeded earnings by $719 million,
$137 million and $663 million for the years ended
December 31, 2004, 2003 and 2001, respectively resulting in
a ratio of less than one. |
19
|
|
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
The following management discussion and analysis gives effect to
the restatement discussed in Note 2 Restatement.
Restatement and Conclusions of Audit Committee
Investigation
Subsequent to the issuance of Delphi’s consolidated
financial statements for the years ended December 31, 2003
and 2002, and following an internal investigation conducted by
the Audit Committee of its Board of Directors, Delphi management
determined that its originally issued financial statements for
those periods required restatement to correct the accounting for
a number of transactions recorded in prior years. Such
transactions included (i) rebates, credits and other lump
sum payments from suppliers; (ii) disposition of indirect
material and other inventories; (iii) warranty settlements
with Delphi’s former parent company; and (iv) certain
other transactions. The effects of the restatement adjustments
on Delphi’s originally reported financial position, results
of operations and cash flows as of and for the year ended
December 31, 2003 and 2002, and on its originally reported
retained earnings at December 31, 2001, are summarized
below.
Delphi is subject to stringent disclosure standards, and
accounting, corporate governance and other securities
regulations, including compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 (“Section 404”), as
well as the listing standards of the New York Stock Exchange.
Delphi management’s assessment pursuant to Section 404
determined that Delphi had not maintained effective internal
controls over financial reporting at December 31, 2004. In
addition, management concluded that during such periods,
Delphi’s disclosure controls and procedures were also
ineffective. Delphi has undertaken and is continuing to take
actions to address material weaknesses in its internal controls
over financial reporting and the deficiencies in its disclosure
controls and procedures. For more detail on the weaknesses and
deficiencies identified and remedial actions see Part II,
Item 9A — Controls and Procedures. Delphi’s
failure to timely and effectively remediate its control
weaknesses and deficiencies may have a material adverse affect
on its business.
20
The following table summarizes the effects of the restatement
adjustments on Delphi’s originally reported net income
(loss) for the years ended December 31, 2003 and 2002 and
on its originally reported retained earnings at
December 31, 2001.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) | |
|
|
| |
|
Year Ended | |
|
Retained | |
| |
|
December 31, | |
|
Earnings at | |
| |
|
| |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
|
2001 | |
| |
|
| |
|
| |
|
| |
|
As originally reported
|
|
$ |
(56 |
) |
|
$ |
342 |
|
|
$ |
1,268 |
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Information technology service provider rebates(a)
|
|
|
13 |
|
|
|
13 |
|
|
|
(58 |
) |
| |
Non-IT supplier rebates(a)
|
|
|
(5 |
) |
|
|
2 |
|
|
|
(28 |
) |
| |
Deferred expense recognition for IT services(b)
|
|
|
20 |
|
|
|
(22 |
) |
|
|
— |
|
| |
Indirect material dispositions(c)
|
|
|
45 |
|
|
|
— |
|
|
|
(50 |
) |
| |
Inventory disposal transactions(d)
|
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
| |
Warranty settlements with former parent company(e)
|
|
|
28 |
|
|
|
(20 |
) |
|
|
(225 |
) |
| |
Period-end accruals and other out of period items(f)
|
|
|
(34 |
) |
|
|
(14 |
) |
|
|
(29 |
) |
| |
Other(g)
|
|
|
— |
|
|
|
(19 |
) |
|
|
(40 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
67 |
|
|
|
(59 |
) |
|
|
(431 |
) |
| |
Related tax effects
|
|
|
(21 |
) |
|
|
35 |
|
|
|
166 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total adjustments, net of tax
|
|
|
46 |
|
|
|
(24 |
) |
|
|
(265 |
) |
| |
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$ |
(10 |
) |
|
$ |
318 |
|
|
$ |
1,003 |
|
| |
|
|
|
|
|
|
|
|
|
The following represents a summary of the nature and amount of
the adjustments reflected in the restatement (all amounts are
pre-tax unless otherwise noted):
|
|
|
|
(a) |
|
Information technology service provider and non-IT
supplier rebates |
| |
|
|
|
Delphi did not recognize certain liabilities or appropriately
defer recognition of payments and credits that were received in
conjunction with agreements for future information technology
services. In addition, the investigation identified other rebate
transactions occurring between 1999 and 2004 in which the
payments and credits received by Delphi from suppliers were tied
to agreements for the provision of future services or products,
and for which Delphi recognized the payment or credit when
received rather than as the services were performed or products
were purchased. In addition, in certain of these transactions,
credits were accrued without sufficient certainty of the
collectibility of the amount recorded. The impact of these
adjustments on originally reported retained earnings at
December 31, 2001 and on 2002 and 2003 pre-tax income is
$(86) million, $15 million and $8 million,
respectively. |
| |
|
(b) |
|
Deferred expense recognition for IT services |
| |
|
|
|
Delphi improperly deferred recognition of approximately
$22 million of payments made for system implementation
services in 2002. These payments should have been recorded as
expense when services were rendered, rather than deferred and
recorded as an expense in later periods. |
| |
|
(c) |
|
Indirect material dispositions |
| |
|
|
|
In 1999 and 2000, Delphi improperly recorded asset dispositions,
in a series of transactions, amounting to approximately
$145 million of indirect materials to an indirect material
management company. Delphi recorded pre-tax income of
approximately $60 million in 1999 and an additional
$16 million in 2000 from the transactions. The transactions
should not have been accounted for as asset dispositions but
rather as financing transactions, principally because Delphi had
an obligation to repurchase such materials. The gain recognized
at the time of sale and subsequent expense recognized in periods
when |
21
|
|
|
|
|
|
materials were repurchased has been eliminated. The pre-tax
operating income effect primarily reflects earlier recognition
of valuation allowances related to this material resulting in a
decrease in retained earnings at December 31, 2001 of
$50 million and a reduction of $45 million in the
pre-tax loss for 2003. The cash flow effect of accounting for
these transactions as financings is to reclassify approximately
$138 million and $33 million of cash flow from
operations to cash flow from financing activities in 1999 and
2000, respectively. In 2002 and 2003, Delphi repurchased certain
indirect materials from the indirect material management
company, recording a portion of the material repurchased as
assets and writing-off the remainder. |
| |
|
(d) |
|
Inventory disposal transactions |
| |
|
|
|
In 2000 and 2001, Delphi entered into several transactions, in
each case improperly recording the transaction as a disposal of
inventory to a third party and repurchasing the same inventories
in subsequent periods. Each of these transactions should have
been accounted for as a financing transaction, not a disposal.
Specifically, in the fourth quarter of 2000, Delphi entered into
transactions, one for approximately $70 million, a second
to a different third party for approximately $200 million,
and a third, also with a different third party, for
approximately $7 million. In the first transaction, Delphi
recorded a disposal of inventory at book value; in the second,
which involved precious metals, Delphi recorded a disposal of
inventory at a gain of approximately $6 million, and in the
third, Delphi recorded a disposal of inventory of a gain of
approximately $1 million. In the first and fourth quarters
of 2001, Delphi disposed of $10 million and
$9 million, respectively of inventory at book value.
Recording the fourth quarter transactions as inventory disposals
resulted in the recognition of LIFO inventory gains that
increased pre-tax income for the year ended December 31,
2000 by approximately $100 million. Finally, in the case of
the $70 million transaction in 2000 and each of the
transactions in 2001, Delphi recorded an account receivable for
the purchase price, and then allowed the third party to settle
the account receivable using cash received through financing
arranged by Delphi. As a result, Delphi received no increased
cash flow in the quarter the inventory was sold. Because Delphi
changed its accounting for inventories from the LIFO method to
the first-in-first-out method (FIFO) in 2003, and generally
accepted accounting principles required the restatement of its
historical financial statements to give retroactive effect to
the accounting change, the transactions’ impact on LIFO
reserves had been previously eliminated. Accordingly, the impact
of these transactions on originally reported pre-tax income was
to reduce 2000 pre-tax income by approximately $7 million
and increase 2001 pre-tax income by approximately
$6 million. The cash flow statement impact on originally
reported results is to reclassify approximately
$200 million included in 2000 cash flow from operations to
cash provided by financing activities and to conversely increase
2001 cash flow from operations and cash used for financing
activities each by approximately $200 million. |
| |
|
(e) |
|
Warranty settlements with former parent company |
| |
|
|
|
Delphi improperly accounted for $202 million in cash
payments made to its former parent in calendar year 2000 as a
pension settlement agreement. The payment should have been
accounted for as a settlement of warranty claims and should have
been expensed or charged against the warranty accrual in 2000
rather than reflected as an adjustment to post retirement
obligations and amortized over future periods. Furthermore, with
respect to $85 million in credits received in 2001 from its
former parent, Delphi determined that $30 million of such
credits were improperly recorded as a reduction to expense in
2001 and 2002. The credits should have been recognized as a
reduction to warranty obligations when utilized. The net effect
of these changes is to reduce 2001 pre-tax income by
$30 million, reduce 2002 pre-tax income by $20 million
and increase 2003 pre- tax income by $20 million. In
addition, in conjunction with a separate agreement, Delphi
should have recognized a $10 million warranty obligation to
its former parent in the first quarter of 2003. This adjustment
has the effect of reducing 2003 pre-tax earnings by
$10 million. The income impact of the warranty settlement
adjustments is partially offset by the reversal of a portion of
pension expense being recognized in conjunction with the
original accounting treatment, $7 million, $0 and
$18 million in 2001, 2002 and 2003 respectively. |
22
|
|
|
|
(f) |
|
Period-end Accruals and Other Out of Period
Adjustments |
| |
|
|
|
Delphi identified obligations that were not properly accrued for
at the end of an accounting period. Delphi also identified other
accounting adjustments that were not recorded in the proper
period. These out of period adjustments were not material to the
financial statements as originally reported; however, as part of
the restatement, are being recognized in the period in which the
underlying transaction occurred. The impact of these adjustments
on originally reported pre-tax income for 2002 and 2003 is
$(14) million and $(34) million, respectively. |
| |
|
(g) |
|
Other |
| |
|
|
|
As part of the restatement, other adjustments were identified,
none of which are individually significant. |
Executive Summary of Business
We are a global supplier of vehicle electronics, transportation
components, integrated systems and modules and other electronic
technology. Our technologies are present in more than
75 million vehicles on the road worldwide as well as 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. 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 2005 will generally not impact our financial results until
2007 or beyond. Additionally, our results are heavily dependent
on overall vehicle production throughout the world. Consistent
with one of the primary rationales for separating Delphi from
General Motors (“GM”), we have diversified our
customer base significantly since our separation from GM in 1999
(the “Separation”). Our sales to GM have declined
since the Separation; principally reflecting the impact of
customer trends, the exit of some businesses, changes in our
vehicle content and the product mix supplied to them, as well as
GM’s diversification of its supply base.
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 eliminating unprofitable
businesses, including those that are part of our Automotive
Holdings Group (“AHG”) operations, and reducing
overall material costs. In addition, our customers generally
require that we demonstrate improved efficiencies, through cost
reductions and/or price decreases, on a year over year basis.
See “Results of Operations” for more details as to the
factors, which drive year-over-year performance.
Our 2004 net sales were $28.6 billion, up from
$28.1 billion from 2003. Non-GM revenues were
$13.2 billion, or 46% of sales, up 20% from 2003. Our 2004
GM sales were $15.4 billion, down 9% from last year. For
the full year, 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 non-auto applications. The employee
and product line initiatives announced in 2003 are now complete.
Savings realized from our prior restructuring plans combined
with other operating performance improvements have allowed us to
partially offset the challenges of rising wages, pension and
healthcare costs, as well as continued price pressures. We
remain focused on reducing structural costs. In 2004, we
experienced a more challenging U.S. vehicle manufacturer
production environment combined with slowing attrition of our
U.S. hourly workforce, increased commodity price pressures
as well as program launch and volume related cost issues.
During 2004, we were challenged by commodity cost increases,
most notably steel and petroleum-based resin products. We
continue to proactively work with our suppliers and customers to
manage these cost pressures. Despite our efforts, cost
increases, particularly when necessary to ensure the continued
financial viability of key suppliers, had the effect of reducing
our earnings during 2004. Raw material steel supply has
continued to be constrained and commodity cost pressures have
continued to intensify as our supply contracts expire during
2005. For 2005, we expect to incur $0.4 billion of higher
commodity cost
23
than 2004. This amount includes $0.1 billion for costs
associated with troubled suppliers. We have been seeking to
manage these cost pressures using a combination of techniques,
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 earnings in future periods may be adversely
impacted. To date, due to previously established 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 that enable us to
recover the actual commodity costs we are incurring.
Our Board of Directors and management use cash generated by the
businesses as a measure of our performance. We believe the
ability to consistently generate cash flow from operations 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, and paying dividends. We believe
that looking at our ability to generate cash provides investors
with additional insight into our performance. Refer to further
discussion of cash flows in “Liquidity and Capital
Resources” below.
In the fourth quarter of 2004, Delphi recorded charges totaling
$502 million pre-tax, primarily related to the
recoverability of certain of Delphi’s U.S. legacy
plant and employee cost structure. Included in the
$502 million total are asset impairment charges of
$363 million, $81 million of postemployment
obligations, $46 million of goodwill impairment and
$14 million of other exit costs, reduced by $2 million
reversal of the employee and product line charges taken in Q3
2003. 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. Where the carrying
value exceeded the future cash flows, an impairment charge is
being recognized for the amount that the carrying value exceeds
the discounted future cash flows. 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. The $46 million goodwill impairment
charge is primarily attributable to a decrease in reporting
units’ estimated fair values based upon the effect of
market conditions on current operating results and on
management’s projections of future financial performance,
specifically lower North American vehicle production levels
and higher commodity costs.
In the fourth quarter of 2004, Delphi also recorded an
additional $4.7 billion valuation allowance on the
U.S. deferred tax assets due to a change in our assessment
of the recoverability of these assets. Of this amount,
$4.7 billion was recorded to income tax expense and
$64 million was recorded to other comprehensive income. See
Taxes below in Results of Operations for a more detailed
discussion on the charge.
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 a reduction
of approximately 6,175 employees 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.
During 2004, we incurred charges related to these initiatives of
approximately $185 million ($86 million in cost of
sales and $99 million in employee and product line
charges). The charges to cost
24
of sales include costs for employees who are idled prior to
separation. Plans to separate U.S. salaried and
non-U.S. salaried employees under a variety of programs
were substantially completed during the first quarter of 2004.
During 2004, approximately 4,575 U.S. hourly employees
flowed back to GM, retired, or separated through other means.
We will continue to seek savings from restructuring plans and
improvements in operating performance to address the challenges
of legacy costs associated with declining GM revenues, rising
commodity costs, increased wages, pension and healthcare costs,
as well as continued price pressures. On December 10, 2004,
we announced restructuring plans for 2005 to further reduce our
workforce by 8,500 positions in 2005 through GM flowbacks,
normal attrition and incentivized retirements. Of the total
reductions, 3,000 are expected to be U.S. hourly employees
and 5,500 are planned to be non-U.S. employees. Total
charges related to these initiatives are expected to be
primarily cash charges of approximately $163 million
pre-tax.
Acquisitions and Divestitures
On December 7, 2004, Delphi Medical Systems, a subsidiary
of Delphi, acquired Peak Industries, Inc. (“Peak”),
for approximately $44 million, net of cash acquired. 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. 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 in 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 our consolidated financial statements from the date of
acquisition. The purchase prices and related allocations are
preliminary and may be revised as additional information is
obtained.
Results of Operations
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 | |
|
2003(a) | |
| |
|
| |
|
| |
| |
|
|
|
(As Restated | |
| |
|
|
|
See Note 2) | |
| |
|
(in millions) | |
|
Dynamics, Propulsion, Thermal & Interior
|
|
$ |
14,120 |
|
|
$ |
14,175 |
|
|
Electrical, Electronics & Safety
|
|
|
13,883 |
|
|
|
12,925 |
|
|
Automotive Holdings Group
|
|
|
2,567 |
|
|
|
2,994 |
|
|
Other
|
|
|
(1,948 |
) |
|
|
(2,017 |
) |
| |
|
|
|
|
|
|
| |
Net sales
|
|
$ |
28,622 |
|
|
$ |
28,077 |
|
| |
|
|
|
|
|
|
25
|
|
| (a) |
The 2003 data has been reclassified to conform to the
realignment of our business sectors in 2004 which combined the
interior product lines into the Dynamics, Propulsion,
Thermal & Interior sector (“2004 sector
realignment”), which were previously included in the
Electrical, Electronics, Safety & Interior sector. |
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; see “Results of Operations — Operating
Income.” 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 9.9% for 2004 compared
to gross margin of 11.4% for 2003. Excluding the increase of
$16 million between restructuring charges in 2003 and 2004,
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.
Selling, General and Administrative. 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 and Amortization. Depreciation and
amortization was $1.5 billion for 2004 compared to
$1.1 billion for 2003; the increase primarily reflects
$326 million of charges related to product line impairments
and $46 million of charges related to goodwill impairment
in 2004. Excluding asset impairments, the increase reflects the
impact of currency exchange rates as well as the depreciation of
assets newly placed in service. 2003 depreciation and
amortization includes $58 million of charges related to
product line impairments. Refer to Employee and Product Line
Charges below for discussion of asset impairments recorded in
conjunction with the employee and product line charges recorded
in 2004 and 2003.
26
Employee and Product Line Charges. In the fourth quarter
of 2004, Delphi recorded charges totaling $456 million
pre-tax, primarily related to the recoverability of certain of
Delphi’s U.S. legacy plant and employee cost
structure. Included in the $456 million total are asset
impairment charges of $363 million ($326 million of
which is included in depreciation and amortization expense),
$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 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 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. 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 International Union, United Automobile, Aerospace, and
Agricultural Implement Workers of America (“UAW”)
hourly employees were permitted to return to GM
(“flowback”).
As required under generally accepted accounting principles, 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 in cost of sales and
$99 million in employee and product line charges) were
recorded during 2004, and $561 million was recorded in
2003. The charges to cost of sales include costs for employees
who are idled prior to separation. 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
2002 restructuring charges are discussed in the “2003
versus 2002 Employee and Product Line Charges”. 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.
27
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 postretirement
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 postretirement 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. |
28
Operating Results. Our operating loss was
$482 million for 2004 compared to operating income of
$89 million in 2003. The 2004 operating loss includes
charges of $123 million in cost of sales, $372 million
in depreciation and amortization and $192 million in
employee and product line charges (the “2004
Charges”). The operating income for 2003 includes charges
of $107 million in cost of sales, $58 million in
depreciation and amortization and $396 million in employee
and product line charges (the “2003 Charges”).
Management reviews our sector operating income results excluding
the 2004 Charges and the 2003 Charges. Accordingly, we have
separately presented such amounts in the table below. In
addition, the 2003 data below has been reclassified to conform
to the 2004 sector realignment.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| Product Sector |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
|
|
(As Restated | |
| |
|
|
|
See Note 2) | |
| |
|
(in millions) | |
|
Dynamics, Propulsion, Thermal & Interior
|
|
$ |
(65 |
) |
|
$ |
398 |
|
|
Electrical, Electronics & Safety
|
|
|
955 |
|
|
|
974 |
|
|
Automotive Holdings Group
|
|
|
(590 |
) |
|
|
(591 |
) |
|
Other
|
|
|
(95 |
) |
|
|
(131 |
) |
| |
|
|
|
|
|
|
| |
Subtotal
|
|
|
205 |
|
|
|
650 |
|
|
2004 Charges(a) and 2003 Charges(b)
|
|
|
(687 |
) |
|
|
(561 |
) |
| |
|
|
|
|
|
|
| |
|
Total operating (loss) income
|
|
$ |
(482 |
) |
|
$ |
89 |
|
| |
|
|
|
|
|
|
|
|
| (a) |
Represents the 2004 Charges of $194 million for Dynamics,
Propulsion, Thermal & Interior, $91 million for
Electrical, Electronics & Safety, $395 million for
Automotive Holdings Group and $7 million for Other. |
|
|
|
|
(b) |
|
Represents the 2003 Charges of $86 million for Dynamics,
Propulsion, Thermal & Interior, $114 million for
Electrical, Electronics & Safety, $319 million for
Automotive Holdings Group and $42 million for Other. |
Excluding the impact of the 2004 Charges and 2003 Charges, our
operating income for the year ended December 31, 2004 was
$205 million compared to $650 million for the year
ended December 31, 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.
Interest Expense. Interest expense increased by
$21 million primarily attributable to a full year of
interest related to the junior subordinated notes due to Delphi
Trust I and II and the 6.50% unsecured notes due in 2013
which were outstanding during all of 2004 and only part of 2003.
See discussion below in “Liquidity and Capital
Resources.”
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
29
December 31, 2004, of this amount $4.7 billion was
recorded to income tax expense and $64 million was recorded
to other comprehensive income. 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 (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 our
separation agreement in 1999, 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.
Net Sales. Net sales by product sector and in total for
the years ended December 31, 2003 and 2002 were as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| Product Sector |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(As Restated | |
| |
|
See Note 2) | |
| |
|
(in millions) | |
|
Dynamics, Propulsion, Thermal & Interior
|
|
$ |
14,175 |
|
|
$ |
14,199 |
|
|
Electrical, Electronics & Safety
|
|
|
12,925 |
|
|
|
12,037 |
|
|
Automotive Holdings Group
|
|
|
2,994 |
|
|
|
3,550 |
|
|
Other
|
|
|
(2,017 |
) |
|
|
(2,145 |
) |
| |
|
|
|
|
|
|
| |
Net sales
|
|
$ |
28,077 |
|
|
$ |
27,641 |
|
| |
|
|
|
|
|
|
The 2003 and 2002 data above has been reclassified to conform to
the 2004 sector realignment.
Net sales for 2003 were $28.1 billion compared to
$27.6 billion for 2002. The increase of approximately
$440 million was more than explained by approximately
$960 million of currency exchange rates, primarily the
euro. Our non-GM sales increased by $1.5 billion or 15.7%,
including approximately $760 million resulting from
currency exchange rates and $54 million attributable to the
Grundig Car InterMedia System GMBH (“Grundig”)
acquisition. 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; see “Results of
Operations — Operating Income.” Excluding the
effects of currency exchange rates, our non-GM sales increased
approximately $740 million which 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 2003, our non-GM sales were 39%. Net sales
to GM decreased by $1.1 billion, after approximately
$200 million of currency exchange rates. Excluding the
effects of changes in currency exchange rates, our GM sales
decreased $1.3 billion.
30
This GM sales decrease was due to lower production volumes in
North America, 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
$460 million, or 1.7% for 2003 compared to approximately
$450 million or 1.7% for 2002. On a going forward basis, we
expect future annual price reductions to continue to be in the
2% range.
Gross Margin. Our gross margin was 11.4% for 2003
compared to 12.1% for 2002. The decrease was primarily due to
volume reductions with a gross margin effect of approximately
$300 million and approximately $110 million of retiree
lump sum payments and inventory and warranty charges.
Additionally, we experienced approximately $740 million of
higher wages and increased U.S. pension and healthcare
costs and approximately $460 million of price decreases
offset by lower material costs, manufacturing performance and
savings realized from our restructuring plans. The gross margin
for 2002 included a charge of $37 million related to our
generator product line.
Selling, General and Administrative. Selling, general and
administrative expense was $1.6 billion, 5.7% of total net
sales for 2003, compared to $1.5 billion or 5.3% of total
net sales for 2002. Selling, general and administrative expense
for 2003 was adversely impacted by a legal settlement to one of
our former suppliers of approximately $38 million
($25 million after-tax), in connection with a commercial
dispute. Excluding the impact of the legal settlement, selling,
general and administrative expense was 5.5% of total net sales
for 2003.
Depreciation and Amortization. Depreciation and
amortization for 2003 includes $58 million of charges
related to product line impairments. Excluding these impairment
charges, depreciation and amortization for 2003 was consistent
with amounts for 2002.
Employee and Product Line Charges. The charges for 2003
are discussed in the “2004 versus 2003 Employee and Product
Line Charges” included above in the 2004 versus 2003
analysis.
In the first quarter of 2002, Delphi approved restructuring
plans to eliminate approximately 6,100 positions from our global
workforce, which included 3,100 U.S. employees and 3,000
employees in non-U.S. locations, downsize more than 25
selected facilities in the U.S. and Europe, and exit certain
other activities by the end of the first quarter of 2003. The
restructuring charge totaled $231 million with
$222 million of employee costs (including postemployment
benefits and special termination pension benefits) and
$9 million in other exit costs (lease and contract
cancellation fees). This charge, reduced by a $6 million
reversal for the 2001 restructuring reserve, resulted in a net
restructuring charge of $225 million in the first quarter
of 2002. The restructuring actions were completed as planned in
the first quarter of 2003. Total cash paid for restructuring was
$200 million, with $191 million for employee costs and
$9 million for other exit costs. 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. We have realized savings, principally payroll
and related costs, of approximately $125 million
(after-tax) associated with the restructurings ratably in all
sectors.
Following is a summary of our actions related to our 2002
restructuring charge (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Employee and Product Line Charges |
|
Employee Costs | |
|
Exit Costs | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
First quarter 2002 restructuring charge
|
|
$ |
222 |
|
|
$ |
9 |
|
|
$ |
231 |
|
|
Usage in 2002
|
|
|
(205 |
) |
|
|
(2 |
) |
|
|
(207 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
$ |
17 |
|
|
$ |
7 |
|
|
$ |
24 |
|
|
Usage in first quarter 2003
|
|
|
(17 |
) |
|
|
(7 |
) |
|
|
(24 |
)(a) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2003
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (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
discussed above and $24 million was paid in the first
quarter related to the 2002 charges. |
31
Operating Income. Operating income was $89 million
for 2003 compared to $638 million in 2002. The 2003
operating income includes charges of $107 million in cost
of sales, $58 million in depreciation and amortization and
$396 million in employee and product line charges (the
“2003 Charges”). Similarly, the operating income for
2002 includes charges of $37 million in costs of sales and
$225 million in employee and product line charges (the
“2002 Charges”). Management reviews our sector
operating results excluding the 2003 Charges and the 2002
Charges. Accordingly, we have separately presented such amounts
in the table below. In addition, the 2003 and 2002 data below
has been reclassified to conform to the 2004 sector realignment.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| Product Sector |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(As Restated | |
| |
|
See Note 2) | |
| |
|
(in millions) | |
|
Dynamics, Propulsion, Thermal & Interior
|
|
$ |
398 |
|
|
$ |
433 |
|
|
Electrical, Electronics & Safety
|
|
|
974 |
|
|
|
920 |
|
|
Automotive Holdings Group
|
|
|
(591 |
) |
|
|
(378 |
) |
|
Other
|
|
|
(131 |
) |
|
|
(75 |
) |
| |
|
|
|
|
|
|
| |
Subtotal
|
|
|
650 |
|
|
|
900 |
|
|
2003 Charges(a) and 2002 Charges(b)
|
|
|
(561 |
) |
|
|
(262 |
) |
| |
|
|
|
|
|
|
| |
|
Total operating income
|
|
$ |
89 |
|
|
$ |
638 |
|
| |
|
|
|
|
|
|
|
|
| (a) |
Represents the 2003 Charges of $86 million for Dynamics,
Propulsion, Thermal & Interior, $114 million for
Electrical, Electronics & Safety, $319 million for
Automotive Holdings Group and $42 million for Other. |
|
|
|
|
(b) |
|
Represents the 2002 Charges of $97 million for Dynamics,
Propulsion, Thermal & Interior, $45 million for
Electrical, Electronics & Safety, $104 million for
Automotive Holdings Group and $16 million for Other. |
The decrease in operating income from 2002 primarily reflects
the 2003 Charges in excess of the 2002 Charges and is primarily
due to decreases in volume, as well as increased pension,
healthcare and wages, lower pricing, offset by savings realized
from our restructuring plans, material cost savings,
manufacturing performance and the legal settlement in connection
with a commercial dispute. The increase in net sales
attributable to currency exchange rates did not significantly
impact our operating income, as we manage our currency exposure
through hedging techniques, including derivative instruments.
Interest Expense. Interest expense increased by
$1 million primarily attributable to interest on the junior
subordinated notes due to Delphi Trust I and II and the
6.50% unsecured notes due in 2013. See discussion below in
“Liquidity and Capital Resources.”
Taxes. Our effective tax rate (including the tax related
to minority interest) for 2003 was a benefit of 45% compared to
an expense of 32% for 2002. The 2003 rate was influenced by
entity restructuring, which allowed substantial earnings from
the Asia-Pacific region to be considered indefinitely reinvested
in foreign operations. In addition, during 2003 we experienced
higher than expected earnings outside of the U.S. (where
effective tax rates in certain jurisdictions are lower than the
effective U.S. tax rate).
Liquidity and Capital Resources
|
|
|
Overview of Capital Structure |
Our objective is to appropriately finance our business through a
mix of long-term and short-term debt, and to ensure that we have
adequate access to liquidity. Of our $3.0 billion of
outstanding debt as of December 31, 2004, $2.0 billion
was senior, unsecured debt with maturities ranging from
2006–2029 and
32
approximately $0.4 billion was junior subordinated notes
due to Delphi Trust I and II. This long-term debt primarily
finances our long-term fixed assets. As of December 31,
2004, we had approximately $0.6 billion of short-term debt
and other debt. We have varying needs for short-term working
capital financing as a result of the nature of our business. Our
cash flows during the 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 finance our
working capital through a mix of committed facilities, including
receivables securitization programs, and uncommitted facilities,
including bank lines and factoring lines and to a lesser extent
commercial paper. Although the latter group was not committed,
these facilities have always been available to us. Throughout
2004, we also maintained $3.0 billion of committed
unsecured Credit Facilities. These Credit Facilities consisted
of a 364-day revolving credit line in the amount of
$1.5 billion, which expired in June 2005, and a five-year
revolving credit line in the amount of $1.5 billion, which
will expire in June 2009. As disclosed in our Form 8-K
filed with the SEC on June 15, 2005, we recently amended
our five-year $1.5 billion credit line by increasing the
available credit to $1.8 billion and securing the facility
with a first lien on substantially all material tangible and
intangible assets of Delphi including 65% of the capital stock
of our first tier of foreign subsidiaries. In addition, the
Company raised $1.0 billion through a cross-collateralized
term loan. We used a portion of the term loan to fund
$0.6 billion of pension contributions while the remainder
was used to pay down short-term debt. As a result of the
foregoing refinancing, Delphi maintains access to
$1.8 billion of committed liquidity through the revolving
credit facility, $730 million through the
U.S. securitization program, and
€225 million
and £10 million through the European securitization
programs subject to the limits imposed by our financial
covenants. We view these facilities as providing a sufficient
source of back-up liquidity that is available in case of an
unanticipated event.
Our capital planning process is focused on ensuring that we use
our cash flow generated from our operations in ways that enhance
the value of our company. Historically, we used our cash for a
mix of activities focused on revenue growth, cost reduction,
balance sheet strengthening and to pay dividends. In 2004, we
used our cash primarily for funding our employee and product
line programs and balance sheet strengthening, as we contributed
a significant portion of our operating cash flow to our pension
plans and to a lesser extent for dividends. In 2005, we plan to
use our cash primarily to strengthen our balance sheet, reduce
operating costs and to continue to pay dividends to the extent
approved by our Board of Directors. Our Board is free to change
its dividend practices at any time and to decrease or increase
the dividend paid, or not to pay a dividend, on our Common Stock
on the basis of the results of operations, financial condition,
cash requirements and future prospects of our company and other
factors deemed relevant by our Board. As part of our capital
planning, we have taken into account that we currently have
ERISA pension funding minimums of $1.1 billion in 2006.
Based upon current overall macroeconomic conditions, we will
likely face additional ERISA minimums in 2007. Further
discussion regarding pension plan contributions can be found in
“Outlook-U.S. Pension Plans and Other Postretirement
Benefits.” In addition, we anticipate approximately
$0.2 billion of product line and employee cost payments,
from our previously announced and ongoing restructuring
programs, and approximately $20 million to $70 million
of dividends in 2005. We expect that we will be able to fund
these amounts with cash flow from operations, the repatriation
of earnings and excess cash from non-U.S. operations and
the new $1.0 billion term loan. We further expect that we
will be able to fund our longer-term requirements, including
repayments of debt securities and payments for purchase options
and residual value guarantees on operating leases, if exercised,
as they become due.
|
|
|
Bonds and Trust Preferred Securities |
Our unsecured debt includes $500 million of securities
bearing interest at 6.50% and maturing on August 15, 2013.
We pay interest on these notes on February 15 and August 15 of
each year which began February 15, 2004. In addition, our
unsecured debt includes our next maturity of $500 million
of securities bearing interest at 6.55% and maturing on
June 15, 2006, $500 million of securities bearing
interest at 6.50% and maturing on May 1, 2009, and
$500 million of securities bearing interest at 7.125% and
maturing on May 1, 2029.
33
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 are listed on the New York Stock Exchange under the
symbol DPHprA. 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.
Since our Form 10-Q for the third quarter of 2004,
Form 10-K for the year ended 2004, and Form 10-Q for
the first quarter of 2005 were not filed timely due to the Audit
Committee investigation, we are now deficient in our SEC
filings. We are currently ineligible to use Forms S-2 and
S-3 to register securities until all required reports under the
Securities Exchange Act of 1934 have been timely filed for the
12 months prior to the filing of the registration statement
for those securities. This means that we are unable to use our
presently effective shelf registration statement to sell
securities in the public market without first obtaining a waiver
from the SEC. However, we do not believe this will have a
material impact on our liquidity as we have secured financing
through private institutional investors. In addition, we do not
believe that the delay in our filing situation has had a
material adverse effect on our available credit facilities
(described above) or the indentures governing our debt
obligations. We anticipate that shortly following the filing of
our Form 10-K for the year ended 2004, we will file our
other delinquent filings and as such will return to compliant
filing status.
|
|
|
Available 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 (the
“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, which was renewed in 2004 and now
expires in June 2009, and a 364-day revolving credit line in the
amount of $1.5 billion, which expired in June 2005. We have
never borrowed under either of these Credit Facilities. However,
Delphi had approximately $57 million in letters of credit
outstanding against the Credit Facilities as of
December 31, 2004. Our Credit Facilities also contain
certain affirmative and negative covenants including a financial
covenant requirement for a debt to EBITDA coverage ratio not to
exceed 3.25 to 1.0 at December 31, 2004. In addition,
certain of our lease facilities discussed below contain
cross-default provisions to our Credit Facilities. We were in
compliance with the financial covenant and all other covenants
as of December 31, 2004.
On March 28, 2005, Delphi reached agreement with its
syndicate of lenders to amend certain terms of its
$3.0 billion revolving credit facilities including its
EBITDA coverage ratio. Delphi also agreed to the elimination of
its option to extend repayment for up to one year beyond the
expiration date of its 364-day revolving credit line for any
amounts outstanding on the expiration date. Additionally, the
syndicate of lenders waived Delphi’s obligation to provide
audited financial statements for the year ended
December 31, 2004 until June 30, 2005.
Further, 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”). As
previously announced, upon the effectiveness of the new
Facilities, Delphi terminated its 364-day revolving credit
facility in the amount of $1.5 billion.
34
As a result of the foregoing refinancing, Delphi has replaced
its previous $3.0 billion revolving credit facility 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
facility, nor had these revolving credit facilities been
previously borrowed upon. Delphi believes that the completion of
this refinancing plan should provide Delphi with access to
sufficient liquidity to continue to address its U.S. legacy
cost issues during the current low GM North American production
environment. As contemplated under the Facilities, on
June 14, 2005 Delphi contributed $475 million to its
U.S. pension plans, bringing the total contributions for
the quarter to $625 million and fulfilling Delphi’s
2005 minimum pension funding requirements.
The Term Loan requires interest payments during the term at a
variable interest rate of 650 basis points above the
Eurodollar base rate, which is the London Interbank Borrowing
Rate (“LIBOR”). On June 14, 2005, one-month LIBOR
was 3.2% per annum. The LIBOR interest rate period can 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 LIBOR through the term of the loan. The Term Loan
has a 1% per annum amortization for the first 5 years
and 9 months. The then outstanding principal and any
accrued and unpaid interest is due in full at the end of term,
on June 14, 2011. The Term Loan is not repayable in the
first year and, in accordance with the terms of the Facilities,
during the second and third year is subject to call premiums on
the balance outstanding of 2% and 1%, respectively. After the
third year, the then outstanding Term Loan principal is
repayable without premium or penalty.
The Revolving Credit Facility carries a variable interest rate
of 500 basis points above LIBOR on outstanding borrowings
subject to adjustment based on Delphi’s credit ratings. The
Revolving Credit Facility has a commitment fee payable on the
unused portion of 50 bps per annum, which is also subject
to adjustment based upon Delphi’s credit ratings. Each of
the interest rates on borrowings and the commitment fee under
the Revolving Credit Facility is adjustable and will fluctuate
as described for the Term Loan. The Revolving Credit Facility
will expire June 18, 2009. Borrowings under the Revolving
Credit Facility are prepayable at Delphi’s option without
premium or penalty.
The Facilities provide 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) and further provides that amounts borrowed
under the Facilities will 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
is limited by a borrowing base computation. The borrowing base
is 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 limit 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 is secured by such
assets (together with other borrowings which are secured by such
assets and obligations in respect of certain sale-leaseback
transactions) will not exceed 15% of Consolidated Net Tangible
Assets (as defined in the indenture applicable to Delphi’s
outstanding bonds and debentures).
The amended Facilities contain financial covenants based on
consolidated leverage ratios, which are 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
35
quarters EBITDA (as defined in the Facilities). The above
mentioned ratio cannot 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. Further, the syndicate of lenders waived
Delphi’s obligation to provide audited financial statements
for the year ended December 31, 2004 until
September 30, 2005, and agreed not to consider any
inaccuracy of Delphi’s non-GAAP measures of net liquidity
as disclosed in Delphi’s Form 8-K Current Report filed
with the Securities and Exchange Commission on June 9, 2005
as a material adverse change.
|
|
|
Other Financial Transactions |
We maintain a revolving accounts receivable securitization
program in the U.S. (“U.S. Facility
Program”). This program was accounted for as a sale of
accounts receivable during 2004. As of December 31, 2004,
we had $350 million of accounts receivable sold under this
program. The U.S. Facility Program had $600 million
available and expired on March 24, 2005. 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 agreement. At December 31, 2004, we were in compliance
with the financial covenant and all other covenants.
In March 2005, Delphi amended and renewed through March 22,
2006 its U.S. Facility Program, increasing the borrowing
limit from $600 million to $731 million. In addition,
the U.S. Facility Program was amended to conform the
leverage ratio financial covenant consistent with the amended
Credit Facilities’ covenant. Also, the U.S. program
lenders granted waivers similar to those granted under the
Credit Facilities’ amendments. The U.S. program
amendment also allows 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,
will be accounted for prospectively as a secured borrowing. In
June 2005, Delphi further amended the U.S. Facility Program
to add a new co-purchaser to the program, to adjust the
borrowing limit from $731 million to $730 million, and
to conform the leverage ratio financial covenant consistent to
the amended Facilities’ covenant. The U.S. Facility
Program lenders also granted waivers similar to those granted
under the Facilities’ amendments.
On December 23, 2004, we renewed the trade receivable
securitization program for certain of our European accounts
receivable at
€225 million
($307 million at December 31, 2004 currency exchange
rates) and £10 million ($19 million at
December 31, 2004 currency exchange rates). Accounts
receivable transferred under this program are accounted for as
short-term debt. As of December 31, 2004, we had no
significant accounts receivable transferred under this program.
The program expires on December 1, 2005 and can be
extended, based upon the mutual agreement of the parties.
Additionally, the European program contains a financial covenant
and certain other covenants similar to our revolving Credit
Facilities (discussed above) that, if not met, could result in a
termination of the agreement. At December 31, 2004, we were
in compliance with all such covenants.
From time to time, certain subsidiaries may also sell
receivables on a non-recourse basis in the normal course of
their operations. As of December 31, 2004, 2003 and 2002,
certain European subsidiaries sold accounts receivable totaling
$354 million, $387 million and $371 million,
respectively. Changes in the level of receivables sold from year
to year are included in the change in accounts receivable within
the cash flow from operations.
We have leased certain property, primarily land and buildings
that are used in our operations, under leases commonly known as
synthetic leases. The leases, which have been accounted for as
operating leases, provide us tax treatment equivalent to
ownership, and also provide us with the option to purchase these
properties at any time during the term or to cause the
properties to be remarketed upon lease expiration. The leases
also provide that if we do not exercise our purchase option upon
expiration of the term and instead elect our remarketing option,
we would pay any difference between the purchase option amount
and the proceeds of remarketing, up to a maximum of
approximately $89 million. At December 31, 2004, the
aggregate fair value of these properties exceeded the minimum
value guaranteed upon exercise of the remarketing option. As of
December 31, 2004, the recorded estimate of the fair value
of the residual value
36
guarantee related to these leases was approximately
$2 million. Under the terms of the lease agreements, we
also provide certain indemnities to the lessor, including
environmental indemnities. In addition, the leases contain
certain covenants, including a financial covenant requirement
that our debt to EBITDA coverage ratio, as defined in the
agreement, not exceed 3.25 to 1. Unlike the Credit Facilities,
this financial covenant has not been amended. In the event of a
default of the terms of the leases, the lessors have the right
to notify us of their election to require that we purchase the
synthetically leased properties, which would require us to pay
the aggregate purchase price of approximately $131 million.
Though we were in compliance with our financial covenants at
December 31, 2004, our audited financials indicate that at
March 31, 2005, our debt to EBITDA coverage ratio exceeded
3.25 to 1. Although we have received no notices from the lessors
of their election to obligate us to purchase the synthetically
leased properties, in June we commenced the process of
exercising our purchase options. As a result, we completed the
purchase of our headquarters property and two manufacturing
facilities in the State of Alabama for approximately
$103 million on June 28, 2005. The purchase of the
second facility, for approximately $28 million, has not yet
been completed.
We also from time to time, enter into arrangements with
suppliers or other parties that result in variable interest
entities as defined by Financial Accounting Standards Board
(“FASB”) Interpretation No. 46,
“Consolidation of Variable Interest Entities”
(“FIN 46”). At December 31, 2004, we had one
variable interest entity (“VIE”), which is a supplier
to one of our U.S. facilities. Our arrangement with this
supplier is to reimburse it for losses incurred related to
materials supplied to us and to receive a refund for any profits
that it makes as it relates to material supplied to us. This
arrangement is in effect through 2007. In 2004, this VIE had
sales of approximately $10 million, 69% of which were to
Delphi. This supplier has approximately $4 million in
assets and $4 million in liabilities; the latter of which
include a loan of approximately $2.7 million from Delphi.
This VIE does not have any other means of support other than
Delphi. As required under FIN 46, we have consolidated this
entity and eliminated all intercompany transactions. Given the
nature of our relationship with this VIE, it is not possible to
estimate the maximum amount of our exposure or the fair value.
However, we do not expect such amounts, if any, to be material.
In 2004, we maintained a program with General Electric Capital
Corporation (“GECC”) that allowed some of our
suppliers to factor their receivables from us to GECC for early
payment. This program also allowed us to have GECC pay our
suppliers on our behalf, providing extended payment terms to us.
In 2004, Delphi had been working toward minimizing our
involvement in this program and it was discontinued in the first
quarter of 2005. Our December 31, 2004 and 2003 short-term
debt balances include $8 million and $168 million,
respectively, of accounts payable that were factored by our
suppliers to GECC but which are still within our stated payment
terms to our suppliers. There were no payables beyond their
stated terms at December 31, 2004 and 2003. Some of our
customers have similar arrangements with GECC, which allow us to
sell certain of our customer receivables, at a discount, to GECC
on a non-recourse basis. When we participate in one of these
programs, our receivables are reduced and our cash balances are
increased. We did not participate in any of these programs at
December 31, 2004 and 2003.
37
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 | |
| |
|
| |
| |
|
|
|
2006 & | |
|
2008 & | |
|
|
| |
|
Total | |
|
2005 | |
|
2007 | |
|
2009 | |
|
Thereafter | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Debt and capital lease obligations
|
|
$ |
2,568 |
|
|
$ |
507 |
|
|
$ |
530 |
|
|
$ |
525 |
|
|
$ |
1,006 |
|
|
Junior subordinated notes due to Delphi Trust I and
Trust II
|
|
|
412 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
412 |
|
|
Operating lease obligations
|
|
|
507 |
|
|
|
140 |
|
|
|
195 |
|
|
|
102 |
|
|
|
70 |
|
|
Contractual commitments for capital expenditures
|
|
|
368 |
|
|
|
351 |
|
|
|
16 |
|
|
|
1 |
|
|
|
— |
|
|
Other contractual purchase commitments, including information
technology
|
|
|
906 |
|
|
|
349 |
|
|
|
514 |
|
|
|
35 |
|
|
|
8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total(1)(2)
|
|
$ |
4,761 |
|
|
$ |
1,347 |
|
|
$ |
1,255 |
|
|
$ |
663 |
|
|
$ |
1,496 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The amounts above exclude our minimum funding requirements as
set forth by ERISA, which are $1.7 billion over the next
two years, including $0.6 billion contributed in the second
quarter of 2005. Our minimum funding requirements after 2005 are
dependent on several factors. We also have payments due under
our other postretirement benefit (“OPEB”) plans. These
plans are not required to be funded in advance, but are pay as
you go. See further discussion in “Outlook —
U.S. Pension Plans and Other Postretirement Benefits”
below. |
| |
| (2) |
The amounts above exclude estimated interest costs of
$170 million, $284 million, $249 million and
$1,569 million, respectively, for 2005, 2006 and 2007, 2008
and 2009 and thereafter. |
We have no financial commitments (such as lines of credit,
standby lines of credit, standby repurchase obligations, or
guarantees of such items) to or on behalf of entities that are
excluded from our consolidated financial statements. From time
to time, we enter into purchase commitments with our suppliers
under customary purchase order terms. Any significant losses
implicit in these contracts would be recognized in accordance
with generally accepted accounting principles. At
December 31, 2004, no such losses existed.
Delphi is rated by Standard & Poor’s, Moody’s
and Fitch Ratings. As of December 31, 2004, we had
long-term credit ratings of BB+/ Baa2/ BBB-, respectively, and
short-term credit ratings of B/ P2/ F3, respectively. We
currently have senior unsecured ratings of B-/ B3/ B,
respectively, preferred stock ratings of CCC+/ Caa2/ CCC+,
respectively, and senior secured debt ratings of BB-/ B1/ BB-,
respectively, due to downgrades in 2005. As a result of the
downgrades, our facility fee and borrowing costs under our
existing five-year Credit Facility increased although
availability was unaffected. We believe we continue to have
access to sufficient liquidity; however, our cost of borrowing
has increased and our ability to access certain financial
markets has been limited. In the event of a further downgrade,
the cost of borrowing will continue to increase and availability
to liquidity may be further constrained.
38
Our capital expenditure program promotes our growth-oriented
business strategy by investing in existing core areas, where
efficiencies and profitability can be enhanced, and by targeting
funds for new innovative technologies, where long-term growth
opportunities can be realized. Capital expenditures by product
sector and geographic region for the periods presented were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Dynamics, Propulsion, Thermal & Interior
|
|
$ |
440 |
|
|
$ |
553 |
|
|
$ |
493 |
|
|
Electrical, Electronics & Safety
|
|
|
386 |
|
|
|
393 |
|
|
|
469 |
|
|
Automotive Holdings Group
|
|
|
55 |
|
|
|
85 |
|
|
|
113 |
|
|
Other
|
|
|
33 |
|
|
|
15 |
|
|
|
12 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total capital expenditures
|
|
$ |
914 |
|
|
$ |
1,046 |
|
|
$ |
1,087 |
|
| |
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
536 |
|
|
$ |
736 |
|
|
$ |
751 |
|
|
Europe, Middle East & Africa
|
|
|
242 |
|
|
|
227 |
|
|
|
283 |
|
|
Asia-Pacific
|
|
|
114 |
|
|
|
55 |
|
|
|
38 |
|
|
South America
|
|
|
22 |
|
|
|
28 |
|
|
|
15 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total capital expenditures
|
|
$ |
914 |
|
|
$ |
1,046 |
|
|
$ |
1,087 |
|
| |
|
|
|
|
|
|
|
|
|
As of December 31, 2004, Delphi had approximately
$368 million in outstanding capital commitments. We expect
capital expenditures to be approximately $0.9 billion in
2005. We currently expect approximately 45% of our 2005 capital
expenditures to occur outside North America.
Operating Activities. Net cash provided by operating
activities totaled $1.5 billion for the year ended
December 31, 2004, compared to $0.9 billion in 2003
and $2.0 billion in 2002. Net cash provided by operating
activities in 2004 was reduced by contributions to our
U.S. pension plans of $0.6 billion and cash paid for
employee and product line initiatives of approximately
$390 million. Changes in the levels of factoring and
securitization also reduced 2004 cash flow from operating
activities by approximately $12 million. Net cash provided
by operating activities in 2003 was reduced by contributions to
our U.S. pension plans of $1.0 billion and cash paid
for employee and product line initiatives and lump sum contract
signing bonuses totaling approximately $325 million.
Changes in the level of factoring and securitization also
reduced 2003 cash flow from operating activities by
approximately $145 million. Net cash provided by operating
activities in 2002 was reduced by a $400 million
contribution to our U.S. pension plans and a
$143 million second quarter payment to GM for previously
recorded separation related obligations for other postretirement
benefits. Changes in the level of factoring and securitization
increased 2002 cash flow from operating activities by
approximately $687 million, primarily due to the
implementation of Delphi’s U.S. factoring program. In
addition to the items described above, operating cash flow is
impacted by the timing of payments to suppliers and receipts
from customers.
Investing Activities. Cash flows used in investing
activities totaled $0.8 billion for the year ended
December 31, 2004, and $1.1 billion for the years
ended December 31, 2003 and 2002. The principal use of cash
in 2004, 2003 and 2002 reflects capital expenditures related to
ongoing operations. 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.
Financing Activities. Net cash used in financing
activities totaled $0.7 billion for the year ended
December 31, 2004, compared to net cash provided by
financing activities of $4 million in 2003 and net
39
cash used in financing activities of $0.6 billion in 2002.
Net cash used in financing activities during 2004 reflected a
$500 million repayment of the 6.125% senior notes due
May 1, 2004 and $157 million of dividends. Cash
provided by financing activities for 2003 includes
$892 million of net proceeds from the debt and trust
preferred issuances discussed above. In addition, we repaid
approximately $707 million of short-term debt and paid
$157 million of dividends. Cash used in financing
activities during 2002 represented repayment of commercial paper
and dividend and treasury stock purchases partially offset by
increased borrowings of short-term debt.
Dividends. The Delphi Board of Directors declared
dividends on Delphi common stock 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.
Stock Repurchase Program. The Board of Directors has
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 2004 and
2003. We repurchased approximately 3 million shares in the
open market during 2002, to offset the effect of shares issued
under those plans and to provide for a more consistent number of
shares outstanding.
Outlook
General. Delphi continues to implement productivity
improvements and related activities designed to reduce overhead,
improve manufacturing processes and streamline our value stream.
In addition, we continue to rationalize our product lines,
reduce excess capacity and operating costs, and respond to
global industry conditions and increased employee related costs
such as U.S. health care and pensions, as well as wages in
non-U.S. locations. We are achieving and anticipate
continued hourly attrition as well as flowback of UAW
represented Delphi employees to GM. We completed consolidation
of one of our AHG sites, Flint West, Michigan during the
third quarter of 2004 and consolidated or ceased production at
three additional AHG sites: Olathe, Kansas; Tuscaloosa, Alabama;
and Anaheim, California in the first quarter of 2005. Also, in
April 2004, Delphi and the UAW finalized a seven-year Supplement
to the 2003 UAW-Delphi National Agreement, setting new wage and
benefit levels for future hires. These future hires are expected
to be phased into our operations over the next several years. On
December 10, 2004, Delphi announced that effective
January 1, 2005, we are moving three additional
manufacturing operations into AHG to accelerate efforts to bring
these sites back to profitability or resolve issues at these
operations through other actions. The additional operations
named to Delphi’s AHG include: Laurel, Mississippi;
Kettering, Ohio; and Home Avenue/ Vandalia, Ohio. Also on
December 10, 2004, we announced restructuring plans for
2005 to further reduce our workforce by 8,500 positions in 2005
through GM flowbacks, normal attrition and incentivized
retirements. Of the total reductions, 3,000 are expected to be
U.S. hourly employees and 5,500 are planned to be
non-U.S. employees. As noted below, our achievement of
further hourly attrition through GM flowbacks may be limited if
lower GM North America production volumes continue.
We currently expect GM North America’s 2005 production to
decrease approximately 10% to between 4.5 million and
4.6 million units. As a result of the lower GM North
America production volumes, an increasing proportion of our
U.S. hourly workforce is, and is expected to continue to be
in a non-active status. Under the terms of our collective
bargaining agreements with our U.S. unions, we are not
generally permitted to permanently lay-off idled workers.
Furthermore, as a result of GM’s lower production volumes,
the opportunities for our employees to flowback to GM has been
limited. Consequently, although we reduced our U.S. hourly
workforce by 15% over the 15 month period ending prior to
December 31, 2004, currently approximately 9% of our
U.S. hourly workforce is in a non-active status. This
situation is placing significant financial burdens on the
Company. We have been and will continue to seek, together with
our labor unions and GM, solutions to our legacy cost structure
challenges. Specifically, we are seeking wage, benefit and
contractual provisions that would permit Delphi’s U.S.
workforce to be competitive with its U.S. peers. To the
extent that we are not successful in identifying solutions to
these challenges, or that GM’s North American production
volumes do not increase, Delphi will continue to experience
significantly reduced financial performance. We believe that the
refinancing
40
plan we completed in June 2005 will provide us with access to
sufficient liquidity to continue to address our U.S. legacy
cost issues during the current low GM North American production
environment. There can be no assurance that over the medium to
long-term, cash generated by operations will continue to be
sufficient to meet our cash obligations without a significant
change in the current economic outlook for the economy as a
whole or GM North America specifically, or a solution to
Delphi’s legacy cost structure issues.
As stated earlier, during 2004, we were challenged by commodity
cost increases, most notably steel and petroleum-based resin
products. We continue to proactively work with our suppliers and
customers to manage these cost pressures. Despite our efforts,
cost increases, particularly when necessary to ensure the
continued financial viability of a key supplier, had the effect
of reducing our earnings during 2004. Raw material steel supply
has continued to be constrained and commodity cost pressures
have continued to intensify as our supply contracts expire
during 2005. For 2005, we expect to incur $0.4 billion of
higher commodity cost than 2004. This amount includes
$0.1 billion for costs associated with troubled suppliers.
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 earnings in future periods may be
adversely impacted. To date, due to previously established
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 addition to conditions in our market and the economy as a
whole, we depend on GM as a customer. GM accounted for 54% of
our net sales for 2004. Our sales to GM have declined since our
separation from GM; 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 them. We
continue to exit some businesses as part of our portfolio review
process. Reflecting these and other factors, we expect our sales
to GM to decline over time. If we are unable to compete
effectively for new GM business, our revenues may decline
further. Additionally, our revenues may be affected by increases
or decreases in GM’s business or market share as well as
cost-reduction initiatives. In 2004, GM North America produced
5.0 million vehicles excluding CAMI Automotive Inc. and New
United Motor Manufacturing, Inc. vehicle production. Our GM
North America content per vehicle for 2004 was $2,546, which was
slightly lower than the previously expected content per vehicle
of $2,571. During 2004, our content per vehicle was reduced due
to exiting of select businesses and the migration of certain
product programs from GM sales to sales to Tier I
customers. We anticipate that our 2005 content per vehicle will
be $2,351. As a result of anticipated lower GM North America
production levels and lower GM content per vehicle, we expect
our 2005 GM revenues to decline approximately 15%. Offsetting
the decline in GM revenues, however, we anticipate our non-GM
revenue to increase approximately 11% such that our consolidated
revenue would decrease approximately 4%.
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 their 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 is
generally consistent with that which we have been providing to
GM in recent years.
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 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 enforce and defend our
intellectual property and face an inherent risk of exposure to
the claims of other suppliers and parties that we have allegedly
violated their intellectual property rights. We cannot ensure
that we will not experience any material warranty, product
41
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, vehicle
manufacturers 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.
Vehicle manufacturers are also increasingly requiring their
outside 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 product supplied did not
perform as represented. Accordingly, although we cannot ensure
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 upon 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.
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,
2004, the projected benefit obligation (“PBO”) of the
U.S. defined benefit pension plans exceeded the market
value of the plan assets by $4.3 billion, compared to
$4.0 billion at December 31, 2003; the increase is
explained as follows:
| |
|
|
|
|
|
| |
|
Underfunded | |
| |
|
Status | |
| |
|
(PBO basis) | |
| |
|
| |
| |
|
(in billions) | |
|
December 31, 2003
|
|
$ |
(4.0 |
) |
| |
Pension contributions
|
|
|
0.6 |
|
| |
2004 asset returns — 13%
|
|
|
0.9 |
|
| |
Impact of discount rate decrease by 50 basis points to 5.75%
|
|
|
(0.7 |
) |
| |
Interest and service cost
|
|
|
(1.0 |
) |
| |
Other
|
|
|
(0.1 |
) |
| |
|
|
|
|
December 31, 2004
|
|
$ |
(4.3 |
) |
| |
|
|
|
During 2004, Delphi contributed $0.6 billion to its pension
plans, of which $0.3 billion was our minimum funding
requirement as determined by employee benefit and tax laws. Our
2005 minimum funding requirement of approximately
$0.6 billion was contributed in the second quarter of 2005.
While contributions subsequent to 2005 are dependent on asset
returns and a number of other factors, after our contribution of
$0.6 billion in the second quarter of 2005, we would be
required by employee benefit and tax laws to make additional
contributions of approximately $1.1 billion in 2006 and
approximately $0.7 billion in 2007, assuming contributions
are made prior to June 15 each year. These contribution
estimates assume that new legislation extending the current rate
relief, which expires after 2005, is passed. If the legislation
is not passed, it is likely that Delphi’s 2007 minimum
funding requirements, as set forth in employee benefit and tax
laws, could increase by up to $0.4 billion.
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 are expected to be
42
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 6.25% for 2003 to 5.75%
for 2004. This 50 basis point decline in the discount rate
increased the underfunded status of our U.S. pension plans
by approximately $0.7 billion. The other postretirement
benefits (“OPEB”) discount rate determined on that
basis decreased from 6.25% for 2003 to 6.00% for 2004. This
25 basis point decline in the discount rate increased the
underfunded status of our U.S. OPEB plans by approximately
$0.3 billion. Finally, the Bush administration has proposed
legislation that would potentially significantly accelerate the
funding of pension obligations by certain
U.S. corporations. Since such legislation has not been
finalized we cannot currently quantify the impact, if any, the
actual legislation may have on our U.S. pension funding
obligations.
For 2004, Delphi assumed a long-term asset rate of return of 9%.
We will also utilize a 9% long-term asset rate of return
assumption in 2005. In developing the 9% expected long-term rate
of return assumption, 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 in line with
our long-term rate of return assumption. The 9% long-term asset
return assumption for 2005 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,
2004, our actual asset allocation was consistent with our asset
allocation assumption.
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, 2004, we had cumulative asset losses of
approximately $0.1 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 2004 resulted in an
accumulated actuarial loss of $3.9 billion at
December 31, 2004. Of this amount, $0.1 billion
represents the deferred market value of assets adjustment and is
not considered when determining 2005 pension expense. An
additional $1.3 billion of loss is excluded as it falls
within our corridor (10% of pension benefit obligation or fair
market value of assets, whichever is higher) in accordance with
SFAS No. 87, “Employers’ Accounting for
Pensions”, when determining 2005 pension expense. The
remaining actuarial loss of $2.5 billion at
December 31, 2004 is amortized over the remaining service
life of our pension plan participants. Our expense related to
amortization of actuarial losses in 2005 will be approximately
$70 million higher than in 2004.
43
Delphi’s U.S. pension expense was $549 million,
$462 million and $293 million in 2004, 2003 and 2002,
respectively. As required by generally accepted accounting
principles, our pension expense for 2005 is determined at the
end of 2004. Our 2005 pension expense is $580 million,
excluding any special termination charges. However, for purposes
of analysis, the following table highlights the sensitivity of
our pension obligations and expense to changes in assumptions:
| |
|
|
|
|
|
|
|
|
| |
|
Impact on pension | |
|
|
| Change in assumption |
|
expense | |
|
Impact on PBO | |
| |
|
| |
|
| |
|
25 bp decrease in discount rate
|
|
+$ |
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 |
|
|
|
— |
|
Generally accepted accounting principles also require us to
record a charge to stockholders’ equity when certain
conditions are met. As of December 31, 2004, our after-tax
charge to stockholders’ equity was $2,469 million,
which is higher than last year’s charge to
stockholders’ equity of $2,006 million primarily due
to the decline in the discount rate.
In addition, we maintain postretirement benefit plans other than
pensions that are not funded. At December 31, 2004 and
2003, the amounts reflected in our consolidated balance sheet
for OPEB obligations were $6.6 billion and
$6.1 billion, respectively. At December 31, 2004 and
2003, the OPEB liabilities were $9.6 billion and
$8.5 billion respectively. 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 OPEB
plan participants.
These plans do not have minimum funding requirements, but rather
are “pay as you go.” As we currently have 0.33
retirees for each active employee, the cash costs that we incur
are lower than the actual expenses. During the 2004 OPEB plan
year, we incurred approximately $226 million of cash costs
including approximately $72 million of payments to GM for
certain of our former employees that flowed back to GM and had
actuarially been determined to retire and $792 million of
expense in 2004 related to these plans.
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 our OPEB liability was
$0.5 billion and is being accounted for as an actuarial
gain, in accordance with guidance from the Financial Accounting
Standards Board (“FASB”). As a result, the gain will
be amortized as a reduction of our periodic expense and balance
sheet liability over the next ten to twelve years, depending on
the terms of the individual plans. OPEB expense during the 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 FASB Staff Position
(“FSP”) 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 our normal
measurement date for our OPEB obligation is September 30 of
each year, FSP 106-2 required a one-quarter lag from the
remeasurement date (December 8, 2003) before applying the
effects of the Act. In connection with our adoption of the
provisions of FSP 106-2 in the third quarter of 2004 we
retroactively reduced our net income for the three months ended
March 31, 2004 by $7 million and increased our net
income for the three months ended June 30, 2004 by
$2 million. The adoption of
44
FSP 106-2 does not impact our net income for any period in 2003
nor has it impacted the $0.5 billion reduction to our
actuarial liability. The restated financial statements reflect
the impact of the adoption of FSP 106-2.
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 expected impact of this amendment will
be a decrease in the OPEB 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 will begin in June 2005.
The declining interest rate environment and changes in the
health care trend and base claims assumptions through 2004
resulted in an accumulated actuarial loss of $3.0 billion
at the 2004 measurement date. Of this amount, $1.1 billion
of losses were generated this year with approximately
$0.3 billion caused by the 25 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 of loss is excluded as it
falls within our corridor (10% of accumulated postretirement
benefit obligation) in accordance with SFAS No. 106
when determining 2005 OPEB expense. The remaining actuarial loss
of $2.0 billion is amortized over the remaining service
life of our OPEB plan participants. Our expense related to
amortization of actuarial losses in 2005 will be approximately
$85 million higher than in 2004.
Delphi’s U.S. OPEB expense was $792 million,
$701 million and $550 million in 2004, 2003 and 2002,
respectively. As required by generally accepted accounting
principles, our OPEB expense for 2005 is determined at the 2004
measurement date. Our 2005 OPEB expense is $874 million,
including the impact of the salaried plan amendment and
excluding any special termination charges. However, for purposes
of analysis, the following table highlights the sensitivity of
our OPEB obligations and expense to changes in assumptions:
| |
|
|
|
|
|
|
|
|
| |
|
Impact on | |
|
Impact on | |
| Change in assumption |
|
OPEB expense | |
|
OPEB liability | |
| |
|
| |
|
| |
|
25 bp decrease in discount rate
|
|
+$ |
25 to 35 Million |
|
|
+$ |
0.3 Billion |
|
|
25 bp increase in discount rate
|
|
-$ |
25 to 35 Million |
|
|
-$ |
0.3 Billion |
|
|
|
| Note: |
This analysis excludes any impact of the amendment to the
Salaried OPEB plan. |
For analytical purposes only, the following table presents the
impact that changes in our health care trend rate would have on
our OPEB liability and OPEB service and interest cost (in
millions):
| |
|
|
|
|
|
|
|
|
| |
|
Impact on service | |
|
Impact on | |
| % Change |
|
& interest cost | |
|
OPEB liability | |
| |
|
| |
|
| |
|
+1%
|
|
$ |
130 |
|
|
$ |
1,398 |
|
|
-1%
|
|
$ |
(96 |
) |
|
$ |
(1,151 |
) |
|
|
| Note: |
This analysis excludes any impact of the amendment to the
Salaried OPEB plan. |
Ongoing SEC Investigation
Delphi is the subject of an ongoing investigation by Staff of
the Securities Exchange Commission (“SEC”) and other
federal authorities involving Delphi’s accounting for and
disclosure of a number of transactions. The transactions include
transactions in which Delphi received rebates or other lump-sum
payments from suppliers, certain off-balance sheet financings of
indirect materials and inventory, and the payment in 2000 of
$237 million in cash, and the subsequent receipt in 2001 of
$85 million in credits, as a result of certain settlements
between Delphi and its former parent company, General Motors.
Delphi’s Audit Committee has completed its internal
investigation of these transactions and concluded that many were
accounted for improperly. The financial information presented in
this Annual Report reflects the
45
corrections to Delphi’s originally issued financial
statements resulting from the Audit Committee’s
investigation. Contemporaneously with the filing of this Annual
Report, Delphi has filed amended Quarterly Reports on
Form 10-Q/ A for the quarters ended March 31, 2004 and
June 30, 2004 that include restated financial statements.
Delphi has also filed its Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004 that includes
financial statements that differ from those included in
Delphi’s Report on Form 8-K dated October 18,
2004. Delphi expects to file its Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005 on or
before June 30, 2005 and thus to become current in its
filings of periodic reports with the SEC.
As previously disclosed in a Form 8-K filing on
June 9, 2005, the results of the investigation also
concluded that Delphi had inaccurately disclosed to credit
ratings agencies, analysts and the Board of Directors the amount
of sales of accounts receivable from 1999 until year-end 2004.
Subsequent to that filing, we also determined that our
disclosure of operating cash flow measured on a non-GAAP basis
as set forth in our earnings releases for the first and second
quarters of 2003 were inaccurate. Specifically, we overstated
this measure of operating cash flow by $30 million in the
first quarter of 2003 and understated the measure by the same
amount in the second quarter of 2003. The Company has enhanced
the disclosure in the Management’s Discussion and Analysis
of Financial Condition and Results of Operations
(“MD&A”) — Liquidity and Capital
Resources section of this Form 10-K to clarify the extent
to which the Company uses factoring facilities as a source of
liquidity.
Delphi is fully cooperating with the SEC’s ongoing
investigation and requests for information as well as the
related investigation being conducted by the Department of
Justice. The Company has entered into an agreement with the SEC
to suspend the running of the applicable statute of limitations
until April 6, 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.
Shareholder Lawsuits
Several class action lawsuits have been commenced against
Delphi, several of Delphi’s subsidiaries, certain of its
current and former directors and officers of Delphi, General
Motors Management Corporation (the named fiduciary for
investment purposes and investment manager to Delphi’s
employee benefit plans), and several current and former
employees of Delphi or Delphi’s subsidiaries, as a result
of its announced intention to restate its originally issued
financial statements. These lawsuits fall into three categories.
One group has been brought under the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”),
purportedly on behalf of participants in certain of the
Company’s and its subsidiaries’ defined contribution
employee benefit pension plans who invested in the Delphi
Corporation Common Stock Fund. Plaintiffs allege that the plans
suffered losses due to the defendants’ breaches of
fiduciary duties under ERISA. To date, the Company has received
service in five such lawsuits and is aware of an additional
eleven that are pending. All pending cases have been filed in
U.S. District Court for the Eastern District of Michigan.
The second group of purported class action lawsuits variously
alleges that the Company and certain of its current and former
directors and officers made materially false and misleading
statements in violation of federal securities laws. To date, the
Company has been served six such lawsuits and is aware of eight
additional lawsuits. The lawsuits have been filed in the
U.S. District Court for the Eastern District of Michigan,
the U.S. District Court for the Southern District of New
York, and the U.S. District Court for the Southern District
of Florida.
The third group of lawsuits pertains to two shareholder
derivative cases and a demand. To date, certain current and
former directors and officers have been named in two such
lawsuits. One has been served in Oakland County Circuit Court in
Pontiac, Michigan, and a second is pending in the
U.S. District Court for the Southern District of New York.
In addition, the Company has received a demand letter from a
shareholder requesting that the Company consider bringing a
derivative action against certain current and former officers.
The derivative lawsuits and the request demand the Company
consider further derivative action premised on allegations that
certain current and former officers made materially false and
misleading statements in violation of federal securities laws.
The Company has appointed a special committee of the Board of
Directors to consider the demand request.
46
Due to the preliminary nature of these cases, the Company is not
able to predict with certainty the outcome of this litigation or
its potential exposure related thereto. Although Delphi believes
that any loss that the Company would suffer under such lawsuits
should, after payment of a $10 million deductible, be
covered by its director and officer insurance policy, it cannot
assure you that the impact of any loss not covered by insurance
or applicable reserves would not be material. Delphi has
recorded a reserve related to these lawsuits equal to the amount
of its insurance deductible.
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.
Environmental Matters
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 and we do not expect such
expenditures to be material in 2005. Environmental requirements
are complex, change frequently and have tended to become more
stringent over time. Accordingly, 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.
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 and 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.
Recently Issued Accounting Pronouncements
Inventory Costs
In November 2004, the FASB issued FASB Statement No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4” (“SFAS 151”).
SFAS 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 151 requires that fixed
production overheads be allocated to conversion costs based on
the normal capacity of the production facilities. SFAS 151
is effective prospectively for inventory costs incurred in
fiscal years beginning after June 15, 2005. We do not
expect the adoption of SFAS 151 to have a material effect
on our financial statements.
47
Share Based Payments
In December 2004, the FASB issued FASB Statement No. 123
(Revised 2004), “Share-Based Payments”
(“SFAS 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 123(R) replaces FASB Statement
No. 123, “Accounting for Stock-Based
Compensation,” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.”
SFAS 123(R) was initially effective for interim or
annual periods beginning after June 15, 2005 with earlier
adoption encouraged. In April 2005, the U.S. Securities and
Exchange Commission delayed the effective date by requiring
implementation beginning in the next fiscal year that begins
after June 15, 2005. Delphi plans to adopt SFAS 123(R)
as of January 1, 2006 using the modified prospective
method. We are currently assessing the effects of
SFAS 123(R), but have not yet determined the impact on the
consolidated financial statements.
Accounting for Conditional
Asset Retirement Obligations
In March 2005, the FASB issued FASB Interpretation No. 47
(“FIN 47”), “Accounting for Conditional
Asset Retirement Obligations, an interpretation of FASB
Statement No. 143.” FIN 47 seeks to clarify
the requirement to record liabilities stemming from a legal
obligation to perform asset retirement activities on fixed
assets when that retirement is conditioned on a future event.
FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. We are currently assessing
the effects of this interpretation, but have not yet determined
the impact on the consolidated financial statements.
Accounting Changes and Error
Corrections
In May 2005, the FASB issued FASB Statement No. 154,
“Accounting Changes and Error Corrections”
(“SFAS 154”). SFAS 154 replaces
Accounting Principles Board 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 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after
December 15, 2005. We do not expect the adoption of
SFAS 154 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. |
48
The table below presents information about the nature and
rationale for Delphi’s critical accounting estimates:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Nature of Estimates |
|
Assumptions/Approaches |
|
|
| Balance Sheet Caption |
|
Critical Estimate 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. VMs
are increasingly seeking to hold suppliers responsible for
product warranties, which may impact our exposure to these costs. |
|
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 |
| |
|
Accrued liabilities and other long-term liabilities
|
|
Postemployment benefits (FAS 112) |
|
Estimates of future costs associated with excess employees,
including length of time, location and ultimate resolution of
status |
|
We use our future production estimates combined with workforce
geographic and demographic data to develop projections of time
frames and related expenses. |
|
• Employee decisions
• Customer decisions
• Discussions with unions |
| |
|
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 in
Note 12 Pension and Other Postretirement Benefits to our
consolidated financial statements. 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
• See “Outlook — U.S. Pension
Plans and Other Postretirement Benefits” above for
additional details |
49
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Nature of Estimates |
|
Assumptions/Approaches |
|
|
| Balance Sheet Caption |
|
Critical Estimate Item |
|
Required |
|
Used |
|
Key Factors |
| |
|
|
|
|
|
|
|
|
|
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 product
lines. |
|
We estimate cash flows using internal budgets based on recent
sales data, independent automotive production volume estimates
and customer commitments. |
|
• Future production estimates
• Customer preferences and decisions
• Product Pricing
• Manufacturing and material cost estimates |
| |
|
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 |
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.
Forward-Looking Statements
All statements contained or incorporated in this report, to the
extent they are not limited to historical fact, which address
operating performance, events or developments that we expect or
anticipate may occur in the future (including statements
relating to future sales, cash flow or earnings expectations,
savings expected as a result of our global restructurings or
other initiatives, portfolio restructuring plans, volume growth,
share of sales, awarded sales contracts and customer
diversification or statements expressing general optimism about
future operating results) are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995 and are intended to be subject to the safe harbor
protection provided by this Act. These statements are made on
the basis of management’s current views and assumptions
with respect to future events; as a result, there can be no
assurance that management’s expectations will necessarily
come to pass. Delphi does not intend or assume any obligation to
update any of these forward-looking statements. Principal
important factors, risks and uncertainties, which may cause
actual results to differ from those expressed in such
forward-looking statements, include, but are not limited to:
|
|
|
| |
• |
Our ability to generate cost savings and operational
improvements in the future and to adapt our cost structure,
particularly at our legacy sites, sufficient to adjust for
significant changes in vehicle production rates or to offset
contractually or competitively required price reductions, price
reductions necessary to win additional business and increases in
raw material or labor costs, including increased funding
requirements for pensions or healthcare costs. |
50
|
|
|
| |
• |
Our ability to execute our portfolio and other global
restructuring and consolidation plans in a manner which
satisfactorily addresses any resultant labor issues, antitrust,
customer concerns, and other matters, any contingent liabilities
related to divestitures or integration costs associated with
acquisitions, and to achieve the benefits relating to reduced
structural costs and improved earnings power that we expect from
these plans. |
| |
| |
• |
Significant downturns in the vehicle production rate in North
America, in particular the United States, Europe or other
markets in which we operate and the cyclical nature of the
automotive industry. |
| |
| |
• |
Our ability to generate sufficient excess cash flow to meet
increased pension and OPEB funding obligations, whether because
of market volatility which adversely impacts our asset return
expectations, the declining interest rate environment or
otherwise. |
| |
| |
• |
Our ability to maintain financial flexibility to make payments
for pensions and other postretirement employee benefits, to
implement capital expenditures and to maintain research and
development spending, all at the levels and times planned by
management. |
| |
| |
• |
Our continued ability to diversify our customer base. |
| |
| |
• |
Our continued dependence on GM as our largest customer and our
ability to retain GM business, by continuing 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. |
| |
| |
• |
Changes in the operations, financial condition, results of
operations, market share or product offerings and pricing
strategies of our customers, including our largest customer, GM,
or significant business partners, whether those result from an
inability of our customers to sufficiently and promptly respond
to changing consumer preferences, or otherwise. |
| |
| |
• |
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. |
| |
| |
• |
Changes in the payment terms our suppliers are willing to
accept, which if substantially different than our current
payment terms, could result in us needing to increase our
short-term borrowings resulting in higher financing costs,
including drawing on our available revolving credit facility. |
| |
| |
• |
Costs relating to 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 associated with
product recalls or warranty or adoption of new or updated
accounting policies and practices. |
| |
| |
• |
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. |
| |
| |
• |
Potential increases in our warranty costs, including increases
due to any assertions by our customers that seek to hold
suppliers responsible for warranty claims. |
| |
| |
• |
Our ability to respond to changes in technology and
technological risks, to protect our patents and other
intellectual property rights and to develop our intellectual
property into commercially viable products. |
| |
| |
• |
The impact of unusual items resulting from on-going evaluations
of business strategies, asset valuations, acquisitions,
divestitures and organizational structures. |
51
|
|
|
| |
• |
Our ability to adapt our product offerings to meet changing
consumer preferences and vehicle manufacturer supply
requirements on a timely, cost effective basis, and the ability
to respond to competitive pressures and react quickly to other
major changes in the marketplace including increased gasoline
prices or consumer desire for and availability of vehicles using
alternative fuels. |
| |
| |
• |
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. |
| |
| |
• |
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 (i.e., North
America, Europe, Latin America and Asia-Pacific). |
| |
| |
• |
Currency exchange rate fluctuations in the markets in which we
operate. |
| |
| |
• |
Other factors, risks and uncertainties detailed from time to
time in our Securities and Exchange Commission filings. |
|
|
| 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 hedging 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 18 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.
Currency Exchange Rate Risk
We have currency exposures related to buying, selling and
financing in currencies other than the local currency 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, Polish zloty, Chinese
yuan (renminbi), British pound, Hungarian forint, Mexican peso,
and Slovakian Koruna. As of December 31, 2004 and 2003, the
net fair value asset of all financial instruments with exposure
to currency risk was approximately $309 million and
$399 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
approximately $48 million at December 31, 2004 and
$68 million at December 31, 2003. The potential gain
in fair value for such financial instruments from a hypothetical
10% favorable change in quoted currency exchange rates would be
approximately $65 million at December 31, 2004 and
$73 million at December 31, 2003. 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.
52
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 $14 million and $32 million at
December 31, 2004 and December 31, 2003, respectively.
If the price of the commodities that are being hedged by our
commodity swaps and options contracts changed adversely by 10%,
the December 31, 2004 fair value assets of our commodity
swaps and options contracts would decrease by $15 million
to a liability of $1 million, and the December 31,
2003 fair value asset would decrease $15 million to
$10 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, 2004 fair value of our
commodity swaps and options contracts would increase by
$15 million and the December 31, 2003 fair value would
increase by $15 million. The changes in the net fair value
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
A portion of our borrowings from third party credit sources is
comprised of $2.4 billion in fixed rate term debt and
junior subordinated notes underlying our trust preferred
securities. We also issue commercial paper and factor accounts
receivable in the U.S., Europe, and Asia. Our outstanding
commercial paper balance was $0.1 billion at
December 31, 2003 and increased to $0.3 billion at
December 31, 2004. The maturities on commercial paper have
been short-term with the majority maturing within one month. Due
to our current credit ratings, Delphi currently does not have
access to the commercial paper market. In addition, factoring
program fees are based upon an interest rate component. However,
given our reliance on fixed rate borrowings to fund long-term
requirements, as discussed more fully in the Liquidity and
Capital Structure section of MD&A and Notes 10 Debt and
11 Junior Subordinated Notes Due to Delphi Trust I and II to the
consolidated financial statements, we believe our interest rate
risk exposure is limited, and accordingly we do not have any
outstanding derivative instruments to manage interest rate risk
as of December 31, 2004. As our fixed rate term debt and
junior subordinated notes underlying our trust preferred
securities begin to mature in 2006, we may experience higher
interest rates.
53
|
|
| 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. 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
accounting principles generally accepted in the United States of
America (“GAAP”).
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2004, based on the framework described in
“Internal Control — Integrated
Framework,” issued by the Commission of Sponsoring
Organizations of the Treadway Commission. During the performance
of this assessment, in July 2004, the Securities and Exchange
Commission (“SEC”) commenced an investigation
regarding transactions between the Company and one of its
information technology service providers, Electronic Data
Systems Corporation. As a result of the SEC investigation, the
Company’s Audit Committee of the Board of Directors
initiated an internal review and later found, and reported to
the SEC, additional transactions that were not properly
accounted for in accordance with GAAP. The results of the
internal review were considered as part of management’s
assessment of its internal control over financial reporting as
of December 31, 2004. Item 9A. Controls and Procedures
contains additional information related to the results of the
internal review.
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, 2004 as a result of the following
identified 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 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; and |
| |
| |
• |
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; |
These control deficiencies contributed to the need to restate
the Company’s financial statements. As further described in
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Restatement and Conclusion of Audit Committee Internal
Investigation, the impact of the restatement on the financial
statements as of December 31, 2004 was to reduce the
originally reported beginning retained earnings balance by
$243 million, in addition to other adjustments identified
and recorded during the course of preparing financial
statements. Accordingly, management determined that these
control deficiencies represent material weaknesses. Because of
the existence of these material weaknesses, management has
concluded that the Company did not maintain effective internal
control over financial reporting as of December 31, 2004,
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, 2004, 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, 2004). Additionally, Deloitte &
Touche LLP expressed an unqualified opinion on the
Company’s 2004 consolidated financial statements. This
report appears under Item 8. Financial Statements and
Supplementary Data Report of Independent Registered Public
Accounting Firm.
54
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 Report on Internal Control Over
Financial Reporting in Item 8, that Delphi Corporation (the
“Company”) did not maintain effective internal control
over financial reporting as of December 31, 2004, 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:
|
|
|
| |
• |
Insufficient numbers of personnel having appropriate knowledge,
experience and training in the application of accounting
principles generally accepted in the United States of America
(“GAAP”) at the divisional level, and insufficient
personnel at the Company’s headquarters to provide
effective oversight and review of 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; and |
55
|
|
|
| |
• |
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. |
These deficiencies resulted in the restatement of the
Company’s financial statements for the years ended 2002 and
2003, and for the quarters within the years ended
December 31, 2003 and 2004 and in the recording of
adjustments that had a material effect on the annual 2004
financial statements. Each of these deficiencies was considered
to be a material weakness based on both the pervasive effect
that the deficiency had or could have had on the accounts within
the Company’s financial statements.
In our opinion, management’s assessment that the Company
did not maintain effective internal control over financial
reporting as of December 31, 2004, 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, 2004, 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, 2004 of
the Company and our report dated June 30, 2005 expressed an
unqualified opinion on those financial statements and financial
statement schedule.
|
|
|
/s/ Deloitte & Touche
LLP
|
|
|
|
|
|
Deloitte & Touche LLP |
|
Detroit, Michigan
June 30, 2005
56
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 (the “Company”) as of
December 31, 2004 and 2003, 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, 2004. 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 management of the Company. 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, 2004 and 2003 and the results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2004, 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, the
accompanying 2003 and 2002 consolidated financial statements
have been restated.
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, 2004, 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 June 30, 2005
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
June 30, 2005
57
DELPHI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
(As Restated | |
|
(As Restated | |
| |
|
|
|
See Note 2) | |
|
See Note 2) | |
| |
|
(in millions, except per share amounts) | |
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
General Motors and affiliates
|
|
$ |
15,417 |
|
|
$ |
17,029 |
|
|
$ |
18,094 |
|
| |
Other customers
|
|
|
13,205 |
|
|
|
11,048 |
|
|
|
9,547 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total net sales
|
|
|
28,622 |
|
|
|
28,077 |
|
|
|
27,641 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of sales, excluding items listed below
|
|
|
25,797 |
|
|
|
24,876 |
|
|
|
24,307 |
|
| |
Selling, general and administrative
|
|
|
1,599 |
|
|
|
1,596 |
|
|
|
1,469 |
|
| |
Depreciation and amortization
|
|
|
1,516 |
|
|
|
1,120 |
|
|
|
1,002 |
|
| |
Employee and product line charges
|
|
|
192 |
|
|
|
396 |
|
|
|
225 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
29,104 |
|
|
|
27,988 |
|
|
|
27,003 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(482 |
) |
|
|
89 |
|
|
|
638 |
|
| |
Interest expense
|
|
|
(232 |
) |
|
|
(211 |
) |
|
|
(210 |
) |
| |
Other income (expense), net
|
|
|
(8 |
) |
|
|
6 |
|
|
|
9 |
|
| |
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes, minority interest, and equity
income
|
|
|
(722 |
) |
|
|
(116 |
) |
|
|
437 |
|
| |
Income tax (expense) benefit
|
|
|
(4,078 |
) |
|
|
69 |
|
|
|
(132 |
) |
| |
Minority interest, net of tax
|
|
|
(39 |
) |
|
|
(45 |
) |
|
|
(32 |
) |
| |
Equity income
|
|
|
86 |
|
|
|
82 |
|
|
|
45 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(4,753 |
) |
|
$ |
(10 |
) |
|
$ |
318 |
|
| |
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic and diluted
|
|
$ |
(8.47 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.57 |
|
| |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58
DELPHI CORPORATION
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
|
|
(As Restated | |
| |
|
|
|
See Note 2) | |
| |
|
(in millions) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
964 |
|
|
$ |
893 |
|
| |
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
| |
|
General Motors and affiliates
|
|
|
2,182 |
|
|
|
2,327 |
|
| |
|
Other customers
|
|
|
1,476 |
|
|
|
1,501 |
|
| |
Retained interest in receivables, net
|
|
|
726 |
|
|
|
717 |
|
| |
Inventories, net:
|
|
|
|
|
|
|
|
|
| |
|
Productive material, work-in-process and supplies
|
|
|
1,413 |
|
|
|
1,318 |
|
| |
|
Finished goods
|
|
|
545 |
|
|
|
478 |
|
| |
Deferred income taxes
|
|
|
39 |
|
|
|
367 |
|
| |
Prepaid expenses and other
|
|
|
354 |
|
|
|
269 |
|
| |
|
|
|
|
|
|
| |
|
|
Total current assets
|
|
|
7,699 |
|
|
|
7,870 |
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
| |
Property, net
|
|
|
5,946 |
|
|
|
6,399 |
|
| |
Deferred income taxes
|
|
|
130 |
|
|
|
3,961 |
|
| |
Goodwill
|
|
|
798 |
|
|
|
773 |
|
| |
Other intangible assets
|
|
|
80 |
|
|
|
81 |
|
| |
Pension intangible assets
|
|
|
1,044 |
|
|
|
1,167 |
|
| |
Other
|
|
|
896 |
|
|
|
815 |
|
| |
|
|
|
|
|
|
| |
|
|
Total assets
|
|
$ |
16,593 |
|
|
$ |
21,066 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Notes payable and current portion of long-term debt
|
|
$ |
507 |
|
|
$ |
892 |
|
| |
Accounts payable
|
|
|
3,504 |
|
|
|
3,133 |
|
| |
Accrued liabilities
|
|
|
2,694 |
|
|
|
2,684 |
|
| |
|
|
|
|
|
|
| |
|
|
Total current liabilities
|
|
|
6,705 |
|
|
|
6,709 |
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
| |
Long-term debt
|
|
|
2,061 |
|
|
|
2,152 |
|
| |
Junior subordinated notes due to Delphi Trust I and II
|
|
|
412 |
|
|
|
412 |
|
| |
Pension benefits
|
|
|
3,523 |
|
|
|
3,577 |
|
| |
Postretirement benefits other than pensions
|
|
|
6,297 |
|
|
|
5,697 |
|
| |
Other
|
|
|
936 |
|
|
|
905 |
|
| |
|
|
|
|
|
|
| |
|
|
Total liabilities
|
|
|
19,934 |
|
|
|
19,452 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
198 |
|
|
|
168 |
|
| |
|
|
|
|
|
|
|
Stockholders’ equity (deficit):
|
|
|
|
|
|
|
|
|
| |
Common stock, $0.01 par value, 1,350 million shares
authorized, 565 million shares issued in 2004 and 2003
|
|
|
6 |
|
|
|
6 |
|
| |
Additional paid-in capital
|
|
|
2,661 |
|
|
|
2,660 |
|
| |
(Accumulated deficit) retained earnings
|
|
|
(3,913 |
) |
|
|
997 |
|
| |
Minimum pension liability
|
|
|
(2,469 |
) |
|
|
(2,006 |
) |
| |
Accumulated other comprehensive income (loss), excluding minimum
pension liability
|
|
|
237 |
|
|
|
(136 |
) |
| |
Treasury stock, at cost (3.8 million and 4.7 million
shares in 2004 and 2003, respectively)
|
|
|
(61 |
) |
|
|
(75 |
) |
| |
|
|
|
|
|
|
| |
|
|
Total stockholders’ (deficit) equity
|
|
|
(3,539 |
) |
|
|
1,446 |
|
| |
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (deficit)
|
|
$ |
16,593 |
|
|
$ |
21,066 |
|
| |
|
|
|
|
|
|
See notes to consolidated financial statements.
59
DELPHI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
(As Restated | |
|
(As Restated | |
| |
|
|
|
See Note 2) | |
|
See Note 2) | |
| |
|
(in millions) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net (loss) income
|
|
$ |
(4,753 |
) |
|
$ |
(10 |
) |
|
$ |
318 |
|
| |
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
1,516 |
|
|
|
1,120 |
|
|
|
1,002 |
|
| |
|
Deferred income taxes
|
|
|
4,259 |
|
|
|
(171 |
) |
|
|
11 |
|
| |
|
Employee and product line charges
|
|
|
192 |
|
|
|
396 |
|
|
|
225 |
|
| |
|
Equity income
|
|
|
(86 |
) |
|
|
(82 |
) |
|
|
(45 |
) |
| |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable and retained interests in receivables, net
|
|
|
91 |
|
|
|
(452 |
) |
|
|
513 |
|
| |
|
Inventories, net
|
|
|
(142 |
) |
|
|
87 |
|
|
|
(119 |
) |
| |
|
Prepaid expenses and other
|
|
|
(151 |
) |
|
|
(197 |
) |
|
|
(74 |
) |
| |
|
Accounts payable
|
|
|
367 |
|
|
|
165 |
|
|
|
131 |
|
| |
|
Employee and product line charge obligations
|
|
|
(296 |
) |
|
|
(156 |
) |
|
|
(318 |
) |
| |
|
Accrued and other long-term liabilities
|
|
|
408 |
|
|
|
78 |
|
|
|
348 |
|
| |
|
Other
|
|
|
120 |
|
|
|
92 |
|
|
|
21 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
1,525 |
|
|
|
870 |
|
|
|
2,013 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Capital expenditures
|
|
|
(967 |
) |
|
|
(1,088 |
) |
|
|
(1,155 |
) |
| |
Proceeds from sale of property
|
|
|
53 |
|
|
|
42 |
|
|
|
68 |
|
| |
Cost of acquisitions, net of cash acquired
|
|
|
(61 |
) |
|
|
(39 |
) |
|
|
— |
|
| |
Other
|
|
|
157 |
|
|
|
25 |
|
|
|
20 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(818 |
) |
|
|
(1,060 |
) |
|
|
(1,067 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net repayments of borrowings under credit facilities and other
debt
|
|
|
(7 |
) |
|
|
(707 |
) |
|
|
(436 |
) |
| |
Repayment of debt securities
|
|
|
(500 |
) |
|
|
— |
|
|
|
— |
|
| |
Net proceeds from issuance of debt securities
|
|
|
— |
|
|
|
492 |
|
|
|
— |
|
| |
Net proceeds from junior subordinated notes due to Delphi
Trust I and II
|
|
|
— |
|
|
|
402 |
|
|
|
— |
|
| |
Dividend payments
|
|
|
(157 |
) |
|
|
(157 |
) |
|
|
(157 |
) |
| |
Purchases of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
(38 |
) |
| |
Issuance of treasury stock
|
|
|
2 |
|
|
|
1 |
|
|
|
12 |
|
| |
Other
|
|
|
(23 |
) |
|
|
(27 |
) |
|
|
(11 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash (used in) provided by financing activities
|
|
|
(685 |
) |
|
|
4 |
|
|
|
(630 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash and cash equivalents
|
|
|
49 |
|
|
|
51 |
|
|
|
(44 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
71 |
|
|
|
(135 |
) |
|
|
272 |
|
| |
Cash and cash equivalents at beginning of year
|
|
|
893 |
|
|
|
1,028 |
|
|
|
756 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents at end of year
|
|
$ |
964 |
|
|
$ |
893 |
|
|
$ |
1,028 |
|
| |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
60
DELPHI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Comprehensive | |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Loss | |
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
| |
|
Common Stock | |
|
Additional | |
|
|
|
Minimum | |
|
|
|
|
|
Total | |
| |
|
| |
|
Paid-in | |
|
Retained Earnings | |
|
Pension | |
|
|
|
Treasury | |
|
Stockholders’ | |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
(Accumulated Deficit) | |
|
Liability | |
|
Other | |
|
Stock | |
|
Equity (Deficit) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Balance at December 31, 2001 (As restated, see Note 2)
|
|
|
565 |
|
|
$ |
6 |
|
|
$ |
2,641 |
|
|
$ |
1,003 |
|
|
$ |
(707 |
) |
|
$ |
(586 |
) |
|
$ |
(90 |
) |
|
$ |
2,267 |
|
| |
Net income (As restated, see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
318 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
318 |
|
| |
Currency translation adjustments and other, net of tax (As
restated, see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
108 |
|
|
|
— |
|
|
|
108 |
|
| |
Net change in unrecognized gain on derivative instruments, net
of tax (As restated, see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
|
|
— |
|
|
|
(10 |
) |
| |
Minimum pension liability adjustment, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,268 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,268 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total comprehensive loss (As restated, see Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(852 |
) |
| |
Shares issued for employee benefit plans, net
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
12 |
|
| |
Shares repurchased for employee benefit plans
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(38 |
) |
|
|
(38 |
) |
| |
Dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(157 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(157 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002 (As restated, see Note 2)
|
|
|
565 |
|
|
|
6 |
|
|
|
2,636 |
|
|
|
1,164 |
|
|
|
(1,975 |
) |
|
|
(488 |
) |
|
|
(111 |
) |
|
|
1,232 |
|
| |
Net loss (As restated, see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
| |
Currency translation adjustments and other, net of tax (As
restated, see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
307 |
|
|
|
— |
|
|
|
307 |
|
| |
Net change in unrecognized gain on derivative instruments, net
of tax (As restated, see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
45 |
|
|
|
— |
|
|
|
45 |
|
| |
Minimum pension liability adjustment, net of tax (As restated,
see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31 |
) |
|
|
— |
|
|
|
— |
|
|
|
(31 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total comprehensive income (As restated, see Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
2,660 |
|
|
|
997 |
|
|
|
(2,006 |
) |
|
|
(136 |
) |
|
|
(75 |
) |
|
|
1,446 |
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,753 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,753 |
) |
| |
Currency translation adjustments and other(a)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
335 |
|
|
|
— |
|
|
|
335 |
|
| |
Net change in unrecognized gain on derivative instruments(a)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
38 |
|
|
|
— |
|
|
|
38 |
|
| |
Minimum pension liability adjustment(a)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(463 |
) |
|
|
— |
|
|
|
— |
|
|
|
(463 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,843 |
) |
| |
Shares issued for employee benefit plans, net
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
15 |
|
| |
Dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(157 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(157 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
565 |
|
|
$ |
6 |
|
|
$ |
2,661 |
|
|
$ |
(3,913 |
) |
|
$ |
(2,469 |
) |
|
$ |
237 |
|
|
$ |
(61 |
) |
|
$ |
(3,539 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
These amounts are not presented net of tax due to the existence
of a valuation allowance in net U.S. deferred tax asset
that was established in 2004. |
See notes to consolidated financial statements.
61
DELPHI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 1. |
SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations — Delphi
Corporation (“Delphi” or the “Company”) is a
world-leading supplier of vehicle electronics, transportation
components, integrated systems and modules. Our most significant
customer is General Motors Corporation (“GM”) and
North America and Europe are our main markets, but we are
continuing to diversify our customer base and our geographic
markets.
Consolidation — The consolidated
financial statements include the accounts of Delphi and domestic
and foreign subsidiaries that are majority-owned and variable
interest entities of which the Company 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 the Delphi
businesses have been eliminated.
Use of Estimates — The preparation of
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires 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.
Revenue Recognition — Delphi’s
revenue recognition policy is in accordance with accounting
principles generally accepted in the United States of America,
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, we may enter
into pricing agreements with our customers that provide for
price reductions that are conditional upon achieving certain
joint cost saving targets. During 2002, we entered into one such
agreement and in connection with this agreement, we recognized
revenue reflecting the full price reduction until the status of
the joint saving efforts were finalized. Sales incentives and
allowances are recognized as a reduction to revenue at the time
of the related sale. In addition, from time to time we make
payments to customers in conjunction with ongoing and future
business. We recognize these payments to customers as a
reduction to revenue at the time we commit to make these payment.
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 $2.1 billion for the
year ended December 31, 2004, $2.0 billion for the
year ended December 31, 2003, and $1.9 billion for the
year ended December 31, 2002.
Cash and Cash Equivalents — Cash and
cash equivalents are defined as short-term, highly liquid
investments with original maturities of 90 days or less.
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. We also have 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, 2004 and 2003, we have available-for-sale
securities with a cost basis of $22 million and
$22 million, respectively, and a carrying value of
$38 million and $27 million, respectively. In the
event that our debt or equity securities experience an other
than temporary impairment, such impairment is recognized as a
loss in the Statement of Operations.
62
Accounts Receivable — In addition to the
asset securitization programs discussed in Note 5 Asset
Securitizations, from time to time we enter into agreements to
sell our accounts receivable. These transactions result in a
reduction in our accounts receivable. The allowance for doubtful
accounts, which is established based upon analysis of trade
receivables that are past their contractual due date, was
$91 million and $92 million as of December 31,
2004 and 2003, respectively.
Retained Interest In Receivables — Under
Delphi’s United States (“U.S.”) revolving
accounts receivable securitization program, the Company sells a
portion of its 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 “Conduits”). When DR
sells an undivided interest to the Conduits, DR retains the
remaining undivided interest. The value of the retained
interest, which may include eligible undivided interests that we
elect not to sell, is shown separately on our consolidated
balance sheet and therefore is not included in our 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. We assess the recoverability of the retained interest on a
quarterly basis and adjust 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. Prior to 2003, our
inventories in the U.S. were valued substantially using the
last-in, first-out (“LIFO”) method. During 2003, we
changed our method of costing our inventories in the
U.S. from the LIFO method to the FIFO method. In accordance
with accounting principles generally accepted in the United
States of America, prior periods have been adjusted to give
retroactive effect to the change. The effect of the change did
not have a significant impact on results for 2003 or 2002. Our
inventory balances as of December 31, 2004 and 2003 are
presented net of valuation allowances, primarily for excess and
obsolete material, of $126 million and $136 million,
respectively.
From time to time, we may receive payments from suppliers. We
recognize 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 costs incurred on customer-owned
special tools which are subject to reimbursement, pursuant to
the terms of a customer contract. 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. 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
63
with the risk involved. 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.
Intangible Assets — We have
approximately $80 million of intangible assets, other than
goodwill. These intangible assets are being amortized over their
useful lives, generally 3-17 years.
Environmental Liabilities — We recognize
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. Such estimates
are based primarily upon 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.
Warranty — We recognize expected
warranty costs for products sold principally at the time of sale
of the product based on management estimates of the amount that
will eventually be required to settle such obligations. These
accruals are based on several factors including past experience,
production changes, industry developments and various other
considerations. Our estimates are adjusted from time to time
based on facts and circumstances that impact the status of
existing claims.
Postemployment Benefits and Employee Termination
Benefits — Delphi’s postemployment
benefits primarily relate to Delphi’s extended-disability
benefit program in the U.S., supplemental unemployment
compensation benefits and employee termination benefits, mainly
pursuant to union or other contractual agreements.
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 these future cash
expenditures is based on the nature of the obligation and the
timing of the expected benefit payments. Voluntary termination
benefits are accrued when an employee accepts the related offer.
Involuntary termination benefits are accrued when management
commits to a termination plan and the benefit arrangement is
communicated to affected employees.
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 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 net loss by
$32 million in 2004, decreased net loss by $43 million
in 2003, and increased net income by $33 million in 2002.
Stock-Based Compensation — Delphi’s
stock-based compensation programs include stock options,
restricted stock, 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
Accounting Principles Board 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
64
awards and new awards issued prior to the adoption of
SFAS No. 123(R) in January 2006. Following the
adoption of SFAS No. 123(R), Delphi will recognize
compensation cost based on the grant-date fair value of the
equity or liability instruments issued, with expense recognized
over the periods that an employee provides service in exchange
for the award. We are currently assessing the effects of
SFAS 123(R), but have not yet determined the impact on the
consolidated financial statements.
Stock options granted during 2004, 2003 and 2002 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 the restricted stock
is recognized over the vesting period. Compensation expense for
SARs is recognized when the current stock price is greater than
the SARs’ exercise price.
If we accounted for stock-based compensation using the fair
value recognition provisions of SFAS No. 123 and
related amendments, our net income (loss) and basic and diluted
earnings (loss) per share would have been as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions, except per | |
| |
|
share amounts) | |
|
Net (loss) income, as reported
|
|
$ |
(4,753 |
) |
|
$ |
(10 |
) |
|
$ |
318 |
|
|
Add: Stock-based compensation expense recognized, net of related
tax effects
|
|
|
11 |
|
|
|
8 |
|
|
|
12 |
|
|
Less: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax
effects
|
|
|
(23 |
) |
|
|
(25 |
) |
|
|
(55 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) income
|
|
$ |
(4,765 |
) |
|
$ |
(27 |
) |
|
$ |
275 |
|
| |
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
(8.47 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.57 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted — as reported
|
|
$ |
(8.47 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.57 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic and Diluted– pro forma
|
|
$ |
(8.49 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.49 |
|
| |
|
|
|
|
|
|
|
|
|
The weighted average fair value of stock options granted was
$3.02, $2.27, and $4.31 during 2004, 2003 and 2002,
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 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Expected volatility
|
|
|
37.4 |
% |
|
|
38.6 |
% |
|
|
37.9 |
% |
|
Risk-free interest rate
|
|
|
4.1 |
% |
|
|
2.7 |
% |
|
|
3.9 |
% |
|
Expected life (years)
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
Dividend yield
|
|
|
2.8 |
% |
|
|
3.5 |
% |
|
|
2.3 |
% |
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 corporate policies and procedures.
Delphi does not enter into derivative transactions for
speculative or trading purposes.
65
As part of the hedging program approval process, Delphi
management representatives are required to identify 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 by Delphi management 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 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, 2004 and 2003, our 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 — We
currently have one class of common stock outstanding. There are
1,350 million shares of common stock authorized, of which
561,210,311 are outstanding (565,025,907 shares issued less
3,815,596 shares held as treasury stock) at
December 31, 2004. Holders of our common stock are entitled
to one vote per share with respect to each matter presented to
our shareholders on which the holders of common stock are
entitled to vote. We paid dividends of $0.28 per share in
2004, 2003, and 2002. There are no cumulative voting rights. Our
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, 2004, we have not issued any
preferred stock.
Earnings Per Share — The basic earnings
per share amounts were computed using weighted average shares
outstanding for each respective year. Diluted earnings per share
amounts also reflect the weighted average impact from the date
of issuance of all potentially dilutive securities during the
years presented, unless the inclusion would have an antidilutive
effect.
Weighted average shares outstanding used in calculating basic
and diluted earnings per share were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Weighted average shares outstanding
|
|
|
560,905 |
|
|
|
560,114 |
|
|
|
559,589 |
|
|
Effect of dilutive securities
|
|
|
— |
|
|
|
— |
|
|
|
2,842 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding
|
|
|
560,905 |
|
|
|
560,114 |
|
|
|
562,431 |
|
| |
|
|
|
|
|
|
|
|
|
Securities excluded from the computation of diluted earnings per
share were approximately 91 million, 87 million, and
62 million anti-dilutive securities for the years ended
2004, 2003 and 2002, respectively.
Reclassifications — Reclassifications
have been made to present minority interest and equity income
separately in the Consolidated Statements of Operations, which
also resulted in a reclassification of income tax expense.
Intangible assets and minority interest have been reclassified
for separate presentation on the Consolidated Balance Sheets.
Equity income has also been reclassified in the Consolidated
Statements of Cash Flows.
66
Subsequent to the issuance of Delphi’s consolidated
financial statements for the years ended December 31, 2003
and 2002, and following an internal investigation conducted by
the Audit Committee of its Board of Directors, Delphi management
determined that its originally issued financial statements for
those periods required restatement to correct the accounting for
a number of transactions recorded in prior years. Such
transactions included (i) rebates, credits and other lump
sum payments from suppliers; (ii) disposition of indirect
material and other inventories; (iii) warranty settlements
with Delphi’s former parent company; and (iv) certain
other transactions. The effects of the restatement adjustments
on Delphi’s originally reported financial position, results
of operations and cash flows as of and for the year ended
December 31, 2003 and 2002, and on its originally reported
retained earnings at December 31, 2001, are summarized
below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) | |
|
|
| |
|
Year Ended | |
|
|
| |
|
December 31 | |
|
|
| |
|
| |
|
Retained Earnings at | |
| |
|
2003 | |
|
2002 | |
|
December 31, 2001 | |
| |
|
| |
|
| |
|
| |
|
As originally reported
|
|
$ |
(56 |
) |
|
$ |
342 |
|
|
$ |
1,268 |
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Information technology service provider rebates(a)
|
|
|
13 |
|
|
|
13 |
|
|
|
(58 |
) |
| |
Non-IT supplier rebates(a)
|
|
|
(5 |
) |
|
|
2 |
|
|
|
(28 |
) |
| |
Deferred expense recognition for IT services(b)
|
|
|
20 |
|
|
|
(22 |
) |
|
|
— |
|
| |
Indirect material dispositions(c)
|
|
|
45 |
|
|
|
— |
|
|
|
(50 |
) |
| |
Warranty settlements with former parent company(d)
|
|
|
28 |
|
|
|
(20 |
) |
|
|
(225 |
) |
| |
Period-end accruals and other out of period items(e)
|
|
|
(34 |
) |
|
|
(14 |
) |
|
|
(29 |
) |
| |
Other(f)
|
|
|
— |
|
|
|
(18 |
) |
|
|
(41 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
67 |
|
|
|
(59 |
) |
|
|
(431 |
) |
| |
Related tax effects
|
|
|
(21 |
) |
|
|
35 |
|
|
|
166 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total adjustments, net of tax
|
|
|
46 |
|
|
|
(24 |
) |
|
|
(265 |
) |
| |
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$ |
(10 |
) |
|
$ |
318 |
|
|
$ |
1,003 |
|
| |
|
|
|
|
|
|
|
|
|
The following represent the adjustments included in the
restatement (all amounts are pre-tax unless otherwise noted):
|
|
|
|
(a) |
|
Information technology service provider and non-IT
supplier rebates |
| |
|
|
|
Delphi recognized the benefit of payments and credits received
for entering into agreements for future information technology
and other services or products in the periods in which the
credits were received rather than in the periods when the
contracted services were performed or the products were
delivered. In addition, in some instances credits were
recognized without sufficient certainty of the collectibility of
the amounts recorded. Finally, Delphi did not recognize
liabilities for certain payments from IT suppliers that were
repayable. |
| |
|
(b) |
|
Deferred expense recognition for IT services |
| |
|
|
|
Delphi improperly deferred recognition of approximately
$22 million of payments made for system implementation
services in 2002. These payments should have been recorded as
expense when services were rendered, rather than deferred and
recorded as an expense in later periods. |
67
|
|
|
|
(c) |
|
Indirect material dispositions |
| |
|
|
|
In 1999 and 2000, Delphi improperly recorded asset dispositions,
in a series of transactions, amounting to approximately
$145 million of indirect materials to an indirect material
management company. The transactions should not have been
accounted for as asset dispositions but rather as financing
transactions, principally because Delphi had an obligation to
repurchase such materials. In 2002 and 2003, Delphi repurchased
certain indirect materials, recording a portion in its
consolidated balance sheet and writing-off the balance of
the material. In addition, at December 31, 2003 Delphi
recorded the remaining materials in its consolidated balance
sheet with a liability to the third party. |
| |
|
(d) |
|
Warranty settlements with former parent company |
| |
|
|
|
In 2000 and 2001 Delphi improperly accounted for cash payments
of $202 million to, and credits of $30 million
received from, its former parent company in settlement of
warranty obligations between the two companies. The cash
payments should have been recorded as additional warranty
expense rather than as a reduction of Delphi’s pension
benefit obligations. The credits should have been recognized as
a reduction to warranty obligations when utilized. The income
impact of the warranty settlement adjustments is partially
offset by the reversal of pension expense recognized in
conjunction with the original accounting treatment. In addition,
Delphi should have recognized a $10 million warranty
obligation to its former parent in the first quarter of 2003. |
| |
|
(e) |
|
Period-end Accruals and Out-of-period Adjustments |
| |
|
|
|
Delphi identified obligations that were not properly accrued for
at the end of an accounting period. Additionally, as part of the
restatement process, accounting adjustments were identified that
were not recorded in the proper period. These items were not
material to the financial statements as originally reported.
However, as part of the restatement, these out-of-period
adjustments are being recognized in the period in which the
underlying transaction occurred. |
| |
|
(f) |
|
Other |
| |
|
|
|
Represents adjustments recorded to correct other miscellaneous
items identified in the restatement, none of which are
individually significant. Amounts include balance sheet
reclassifications required to give effect to restatement
adjustments, including the reclassification of tax-related
liabilities from long-term to current of approximately
$407 million. |
68
The following is a summary of the impact of the restatement on
the originally issued consolidated statement of operations,
consolidated balance sheets and consolidated statement of cash
flows included in this filing.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
| |
|
December 31, 2003 | |
|
December 31, 2002 | |
| |
|
| |
|
| |
| |
|
As Originally | |
|
|
|
As Originally | |
|
|
| |
|
Reported | |
|
Restated | |
|
Reported | |
|
Restated | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions, except per | |
|
(in millions, except per | |
| |
|
share amounts) | |
|
share amounts) | |
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
General Motors and affiliates
|
|
$ |
17,028 |
|
|
$ |
17,029 |
|
|
$ |
17,862 |
|
|
$ |
18,094 |
|
| |
Other customers
|
|
|
11,068 |
|
|
|
11,048 |
|
|
|
9,565 |
|
|
|
9,547 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total net sales
|
|
|
28,096 |
|
|
|
28,077 |
|
|
|
27,427 |
|
|
|
27,641 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of sales, excluding items listed below
|
|
|
24,980 |
|
|
|
24,876 |
|
|
|
24,016 |
|
|
|
24,307 |
|
| |
Selling, general and administrative
|
|
|
1,588 |
|
|
|
1,596 |
|
|
|
1,510 |
|
|
|
1,469 |
|
| |
Depreciation and amortization
|
|
|
1,110 |
|
|
|
1,120 |
|
|
|
988 |
|
|
|
1,002 |
|
| |
Employee and product line charges
|
|
|
396 |
|
|
|
396 |
|
|
|
225 |
|
|
|
225 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
28,074 |
|
|
|
27,988 |
|
|
|
26,739 |
|
|
|
27,003 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
22 |
|
|
|
89 |
|
|
|
688 |
|
|
|
638 |
|
| |
Interest expense
|
|
|
(198 |
) |
|
|
(211 |
) |
|
|
(191 |
) |
|
|
(210 |
) |
| |
Other income (expense), net
|
|
|
(3 |
) |
|
|
6 |
|
|
|
3 |
|
|
|
9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes, minority interest, and equity
income
|
|
|
(179 |
) |
|
|
(116 |
) |
|
|
500 |
|
|
|
437 |
|
| |
Income tax benefit (expense)
|
|
|
81 |
|
|
|
69 |
|
|
|
(190 |
) |
|
|
(132 |
) |
| |
Minority interest, net of tax
|
|
|
(44 |
) |
|
|
(45 |
) |
|
|
(32 |
) |
|
|
(32 |
) |
| |
Equity Income
|
|
|
86 |
|
|
|
82 |
|
|
|
64 |
|
|
|
45 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(56 |
) |
|
$ |
(10 |
) |
|
$ |
342 |
|
|
$ |
318 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic and diluted
|
|
$ |
(0.10 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.61 |
|
|
$ |
0.57 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
69
CONSOLIDATED BALANCE SHEET
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2003 | |
| |
|
| |
| |
|
As Originally | |
|
|
| |
|
Reported | |
|
Restated | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
880 |
|
|
$ |
893 |
|
| |
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
| |
|
General Motors and affiliates
|
|
|
2,326 |
|
|
|
2,327 |
|
| |
|
Other customers
|
|
|
1,438 |
|
|
|
1,501 |
|
| |
Retained interest in receivables, net
|
|
|
717 |
|
|
|
717 |
|
| |
Inventories, net:
|
|
|
|
|
|
|
|
|
| |
|
Productive material, work-in-process and supplies
|
|
|
1,518 |
|
|
|
1,318 |
|
| |
|
Finished goods
|
|
|
478 |
|
|
|
478 |
|
| |
Deferred income taxes
|
|
|
420 |
|
|
|
367 |
|
| |
Prepaid expenses and other
|
|
|
269 |
|
|
|
269 |
|
| |
|
|
|
|
|
|
| |
|
|
Total current assets
|
|
|
8,046 |
|
|
|
7,870 |
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
| |
|
Property, net
|
|
|
6,167 |
|
|
|
6,399 |
|
| |
|
Deferred income taxes
|
|
|
3,835 |
|
|
|
3,961 |
|
| |
|
Goodwill
|
|
|
776 |
|
|
|
773 |
|
| |
|
Other intangible assets
|
|
|
79 |
|
|
|
81 |
|
| |
|
Pension intangible assets
|
|
|
1,167 |
|
|
|
1,167 |
|
| |
|
Other
|
|
|
834 |
|
|
|
815 |
|
| |
|
|
|
|
|
|
| |
|
|
Total assets
|
|
$ |
20,904 |
|
|
$ |
21,066 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
|
Notes payable and current portion of long-term debt
|
|
$ |
801 |
|
|
$ |
892 |
|
| |
|
Accounts payable
|
|
|
3,158 |
|
|
|
3,133 |
|
| |
|
Accrued liabilities
|
|
|
2,232 |
|
|
|
2,684 |
|
| |
|
|
|
|
|
|
| |
|
|
Total current liabilities
|
|
|
6,191 |
|
|
|
6,709 |
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
| |
|
Long-term debt
|
|
|
2,022 |
|
|
|
2,152 |
|
| |
|
Junior subordinated notes due to Delphi Trust I and II
|
|
|
412 |
|
|
|
412 |
|
| |
|
Pension benefits
|
|
|
3,574 |
|
|
|
3,577 |
|
| |
|
Postretirement benefits other than pensions
|
|
|
5,697 |
|
|
|
5,697 |
|
| |
|
Other
|
|
|
1,271 |
|
|
|
905 |
|
| |
|
|
|
|
|
|
| |
|
|
Total liabilities
|
|
|
19,167 |
|
|
|
19,452 |
|
| |
|
|
|
|
|
|
|
Minority interest
|
|
|
167 |
|
|
|
168 |
|
| |
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
|
Common stock, $0.01 par value, 1,350 million shares
authorized, 565 million shares issued in 2004 and 2003
|
|
|
6 |
|
|
|
6 |
|
| |
|
Additional paid-in capital
|
|
|
2,667 |
|
|
|
2,660 |
|
| |
|
Retained earnings
|
|
|
1,241 |
|
|
|
997 |
|
| |
|
Minimum pension liability
|
|
|
(2,118 |
) |
|
|
(2,006 |
) |
| |
|
Accumulated other comprehensive loss, excluding minimum pension
liability
|
|
|
(151 |
) |
|
|
(136 |
) |
| |
|
Treasury stock, at cost (4.7 million shares in 2004 and
2003)
|
|
|
(75 |
) |
|
|
(75 |
) |
| |
|
|
|
|
|
|
| |
|
|
Total stockholders’ equity
|
|
|
1,570 |
|
|
|
1,446 |
|
| |
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
20,904 |
|
|
$ |
21,066 |
|
| |
|
|
|
|
|
|
70
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
| |
|
December 31, 2003 | |
|
December 31, 2002 | |
| |
|
| |
|
| |
| |
|
As Originally | |
|
|
|
As Originally | |
|
|
| |
|
Reported | |
|
Restated | |
|
Reported | |
|
Restated | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
(in millions) | |
|
Cash and cash equivalents at beginning of period
|
|
$ |
1,014 |
|
|
$ |
1,028 |
|
|
$ |
757 |
|
|
$ |
756 |
|
|
Cash flows provided by (used in) operating activities
|
|
|
737 |
|
|
|
870 |
|
|
|
2,073 |
|
|
|
2,013 |
|
|
Cash flows used in investing activities
|
|
|
(1,017 |
) |
|
|
(1,060 |
) |
|
|
(981 |
) |
|
|
(1,067 |
) |
|
Cash flows provided by (used in) financing activities
|
|
|
95 |
|
|
|
4 |
|
|
|
(791 |
) |
|
|
(630 |
) |
|
Effect of exchange rate changes in cash
|
|
|
51 |
|
|
|
51 |
|
|
|
(44 |
) |
|
|
(44 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(134 |
) |
|
|
(135 |
) |
|
|
257 |
|
|
|
272 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
880 |
|
|
$ |
893 |
|
|
$ |
1,014 |
|
|
$ |
1,028 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Also, as discussed in Note 20 Quarterly Data (Unaudited),
Delphi’s originally reported quarterly financial
information for the quarters ended March 31, 2004,
June 30, 2004 and September 30, 2004 and for the four
quarters in the year ended December 31, 2003 have been
restated to give effect to the restatement adjustments.
Refer to Note 20 Quarterly Data (Unaudited) for a summary
of the impact of the restatement on the 2004 and 2003 quarterly
information. In addition, certain amounts in the notes to the
consolidated financial statements have been restated to reflect
the restatement adjustments described above.
|
|
| 3. |
EMPLOYEE AND PRODUCT LINE CHARGES |
2004 and 2003 Charges
In the fourth quarter of 2004, Delphi recorded charges totaling
$456 million pre-tax primarily related to the
recoverability of certain of Delphi’s U.S. legacy
plant and employee cost structure. Included in the
$456 million total are asset impairment charges of
$363 million ($326 million of which is included in
depreciation and amortization expense), $81 million of
postemployment obligations and $14 million of other exit
costs, reduced by $2 million reversal of the employee and
product line charges taken in Q3 2003. 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 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 is being recognized for the amount that the
carrying value exceeds the discounted future cash flows. 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. These charges will result in
future cash expenditures of $81 million, principally in the
Automotive Holdings Group (AHG) sector.
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 attrition to
more than 6,000. We achieved our planned reduction in our
U.S. salaried and non-U.S. hourly workforce. 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
71
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 International Union, United
Automobile, Aerospace, and Agricultural Implement Workers of
America (“UAW”) hourly employees were permitted to
return to GM (“flowback”).
As required under generally accepted accounting principles, 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 in cost of sales and
$99 million in employee and product line charges) were
recorded during 2004, and $561 million was recorded in
2003. The charges to cost of sales include costs for employees
who are idled prior to separation. Plans to separate
U.S. salaried and non-U.S. salaried employees under a
variety of programs were substantially completed during the
first quarter of 2004. During 2004, approximately 4,575
U.S. hourly employees flowed back to GM, retired, or
separated through other means.
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 postretirement
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 postretirement 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. |
2002 Charges
In the first quarter of 2002, Delphi approved restructuring
plans to eliminate approximately 6,100 positions from our global
workforce, which included 3,100 U.S. employees and 3,000
employees in non-U.S. locations, downsize more than 25
selected facilities in the U.S. and Europe, and exit certain
other activities by the end of the first quarter of 2003. The
restructuring charge totaled $231 million with
$222 million of employee costs (including postemployment
benefits and special termination pension benefits) and
$9 million in other exit costs (lease and contract
cancellation fees). This charge, when netted against a
$6 million reversal for the 2001 restructuring reserve,
resulted in a net restructuring charge of $225 million in
the first quarter of 2002. The restructuring actions were
completed as planned in the first quarter of 2003. Total cash
paid for restructuring was $200 million, with
$191 million for employee
72
costs and $9 million for other exit costs. 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 our actions related to our 2002
restructuring charge (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Employee and Product Line Charges |
|
Employee Costs | |
|
Exit Costs | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
First quarter 2002 restructuring charge
|
|
$ |
222 |
|
|
$ |
9 |
|
|
$ |
231 |
|
|
Usage in 2002
|
|
|
(205 |
) |
|
|
(2 |
) |
|
|
(207 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Balance at December 31, 2002
|
|
$ |
17 |
|
|
$ |
7 |
|
|
$ |
24 |
|
|
Usage in first quarter 2003
|
|
|
(17 |
) |
|
|
(7 |
) |
|
|
(24 |
)(a) |
| |
|
|
|
|
|
|
|
|
|
| |
Balance at March 31, 2003
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
discussed above and $24 million was paid in the first
quarter related to the 2002 charges. |
2001 Charges Recorded in 2002
In the first quarter of 2002, we recorded an additional loss of
$37 million related to the 2001 restructuring, reflecting
additional anticipated employee-related payments, due to changes
in the proposed disposition at that time. In July 2002, we
determined that we would not complete the transaction and began
a process to wind down the generator product line. However, due
to the change from our original plan to sell this product line,
in the second quarter of 2002, we reclassified the generator
product line as held for use from held for sale. No additional
adjustments were required as the result of the reclassification.
The $37 million for contractually required payments
(principally employee related) was recorded in cost of sales
during the first quarter of 2002.
|
|
| 4. |
ACQUISITIONS AND DIVESTITURES |
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 purchase prices and related allocations for Peak and Dynamit
Nobel AIS are preliminary and may be revised as additional
information is obtained.
In November 2003, Delphi acquired Grundig Car InterMedia System
GmbH (“Grundig”), a wholly-owned subsidiary of Grundig
AG, for approximately $39 million, net of cash acquired.
Grundig is a full-line producer of vehicle audio systems,
telematics devices and other vehicle entertainment products
primarily for the European automotive original equipment and
aftermarket segments. With this acquisition,
73
Delphi will significantly boost its European electronic sales,
strengthen customer relationships and achieve synergy savings
through integration.
The acquisitions have been accounted for under the purchase
method of accounting and the results of operations are included
in our 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
We maintain a revolving accounts receivable securitization
program in the U.S. (“U.S. Facility
Program”). Under this U.S. Facility Program, we sell a
portion of our U.S. originated 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 (“Conduits”). Neither the
Conduits nor the associated banks are related to Delphi or DR.
The Conduits typically finance the purchases through the
issuance of A1/P1 rated commercial paper. In the event that the
Conduits become unable to or otherwise elect not to issue
commercial paper and make purchases, the associated banks are
obligated to make the purchases. 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”). When DR sells an undivided interest
to the Conduits, DR retains the remaining undivided interest.
The value of the undivided interest sold to the Conduits is
excluded from our consolidated balance sheet thereby reducing
our accounts receivable. The value of the retained interest in
receivables held by DR, which may include eligible undivided
interests that we elect not to sell, is shown separately on our
consolidated balance sheet and therefore is not included in our
accounts receivable. As of December 31, 2004 and 2003, the
retained interest in receivables was $726 million and
$717 million, respectively. We assess the recoverability of
the retained interest on a quarterly basis and adjust 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 1.4% to 1.6% in
2003), and the length of time the receivables are expected to be
outstanding. The loss on sale was approximately
$4.4 million and $5 million for the years ended
December 31, 2004 and 2003, respectively. Additionally, we
perform collections and administrative functions on the
receivables sold similar to the procedures we use for collecting
all of our receivables, including receivables that are not sold
under the U.S. Facility Program. We can elect to keep the
collections and sell additional receivables in exchange; or, we
can transfer the cash collections to the Conduits thereby
reducing the amount of sales of undivided interests to the
Conduits. The nature of the collection and administrative
activities and the terms of the U.S. Facility Program do
not result in the recognition of a servicing asset or liability
under the provisions of SFAS 140 because the benefits of
servicing are just adequate to compensate us for our servicing
responsibilities.
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 24, 2005.
The program was increased from $500 million to
$600 million in March 2004 and can be extended for
additional 364-day periods based upon the mutual agreement of
the parties. The U.S. Facility Program contained 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 December 31, 2004, we were
in compliance with all such covenants.
In March 2005, Delphi amended and renewed through March 22,
2006 its U.S. Facility Program, increasing the borrowing
limit from $600 million to $731 million. In addition,
the U.S. Facility Program was amended to conform the
leverage ratio financial covenant consistent with the amended
credit facilities’ covenant. Also, the U.S. program
lenders granted waivers similar to those granted under the credit
74
facilities’ amendments. The U.S. program amendment
also allows Delphi to maintain effective control over the
receivables such that this program will be accounted for
prospectively as a secured borrowing.
In June 2005, Delphi further amended the U.S. Facility
Program to add a new co-purchaser to the program, to adjust the
borrowing limit from $731 million to $730 million, and
to conform the leverage ratio financial covenant consistent to
the amended Facilities covenant. The U.S. Facility Program
lenders also granted waivers similar to those granted under the
Facilities amendments.
The table below summarizes certain cash flows received from and
paid to the Conduits under the revolving U.S. Facility
Program during the years ended December 31, 2004 and 2003
(in millions):
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Undivided interests sold at beginning of period
|
|
$ |
323 |
|
|
$ |
— |
|
|
Proceeds from new securitizations (sale of undivided interests)
|
|
|
2,760 |
|
|
|
1,708 |
|
|
Collections related to undivided interest sold(a)
|
|
|
(3,803 |
) |
|
|
(2,589 |
) |
|
Collections reinvested through sale of additional undivided
interests
|
|
|
1,070 |
|
|
|
1,204 |
|
| |
|
|
|
|
|
|
|
Undivided interests sold at December 31
|
|
$ |
350 |
|
|
$ |
323 |
|
| |
|
|
|
|
|
|
|
|
|
|
(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.
For the year ended December 31, 2003, $1,385 million
was remitted to the Conduits and $1,204 million was
reinvested. |
European Program
On December 23, 2004, we renewed the trade receivable
securitization program for certain of our European accounts
receivable at
€225 million
($307 million at December 31, 2004 currency exchange
rates) and £10 million ($19 million at
December 31, 2004 currency exchange rates). Prior to the
renewal and as of December 31, 2003, the program was
entered into at
€330 million
($415 million at December 31, 2003 currency exchange
rates) and £30 million ($54 million at
December 31, 2003 currency exchange rates). Accounts
receivable transferred under this program are accounted for as
short-term debt. As of December 31, 2004 and 2003, we had
no significant accounts receivable transferred under this
program. The program expires on December 1, 2005 and can be
extended, based upon the mutual agreement of the parties.
Additionally, the European program contains a financial covenant
and certain other covenants similar to our revolving credit
facilities (discussed above) that, if not met, could result in a
termination of the agreement. At December 31, 2004 and
2003, we were in compliance with all such covenants.
In March 2005, Delphi amended the European trade receivables
securitization program. The European program was also amended to
conform the leverage ratio financial covenant consistent with
the amended credit facilities’ covenant and amended other
procedural terms.
75
6. INCOME TAXES
Income (loss) before income taxes, equity income and
minority interest for U.S. and non-U.S. operations was:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
U.S. income (loss)
|
|
$ |
(1,450 |
) |
|
$ |
(742 |
) |
|
$ |
88 |
|
|
Non-U.S. income
|
|
|
681 |
|
|
|
575 |
|
|
|
314 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Subtotal before impact of minority interest
|
|
|
(769 |
) |
|
|
(167 |
) |
|
|
402 |
|
|
Minority interest, primarily non-U.S.
|
|
|
47 |
|
|
|
50 |
|
|
|
35 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
(722 |
) |
|
$ |
(117 |
) |
|
$ |
437 |
|
| |
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes was:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Current income tax expense (benefit), net
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. federal
|
|
$ |
(277 |
) |
|
$ |
61 |
|
|
$ |
77 |
|
| |
Non-U.S.
|
|
|
132 |
|
|
|
117 |
|
|
|
79 |
|
| |
U.S. state and local
|
|
|
(3 |
) |
|
|
4 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total current income tax expense (benefit)
|
|
|
(148 |
) |
|
|
182 |
|
|
|
158 |
|
|
Deferred income tax expense (benefit), net
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. federal
|
|
|
4,039 |
|
|
|
(288 |
) |
|
|
(34 |
) |
| |
Non-U.S.
|
|
|
(17 |
) |
|
|
50 |
|
|
|
4 |
|
| |
U.S. state and local
|
|
|
197 |
|
|
|
(18 |
) |
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total deferred income tax expense (benefit)
|
|
|
4,219 |
|
|
|
(256 |
) |
|
|
(28 |
) |
|
Investment tax credits
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Subtotal before impact of minority interest
|
|
|
4,070 |
|
|
|
(75 |
) |
|
|
129 |
|
|
Income tax provision related to minority interest
|
|
|
8 |
|
|
|
6 |
|
|
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total income tax provision (benefit)
|
|
$ |
4,078 |
|
|
$ |
(69 |
) |
|
$ |
132 |
|
| |
|
|
|
|
|
|
|
|
|
76
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, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Tax at U.S. federal statutory income tax rate
|
|
$ |
(269 |
) |
|
$ |
(59 |
) |
|
$ |
141 |
|
|
U.S. state and local income taxes
|
|
|
(9 |
) |
|
|
(14 |
) |
|
|
3 |
|
|
Impact of change in state and local effective rate
|
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
Non-U.S. income taxed at other rates
|
|
|
(125 |
) |
|
|
(23 |
) |
|
|
(39 |
) |
|
Change in valuation allowance
|
|
|
4,677 |
|
|
|
33 |
|
|
|
13 |
|
|
Research and experimentation credits, gross
|
|
|
(57 |
) |
|
|
(57 |
) |
|
|
(61 |
) |
|
Other tax credit and deduction carryforwards
|
|
|
(30 |
) |
|
|
(29 |
) |
|
|
(3 |
) |
|
Provision-to-return adjustments
|
|
|
(23 |
) |
|
|
(10 |
) |
|
|
5 |
|
|
Various nondeductible expenses
|
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
|
U.S. tax on unremitted earnings of non-U.S. subsidiaries
|
|
|
76 |
|
|
|
11 |
|
|
|
21 |
|
|
Residual tax on non-U.S. earnings remitted from joint ventures
|
|
|
5 |
|
|
|
6 |
|
|
|
4 |
|
|
U.S. tax on non-U.S. located branches
|
|
|
1 |
|
|
|
5 |
|
|
|
— |
|
|
ESOP payments
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
— |
|
|
Difference in basis for RSU awards
|
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
Reversal of income tax reserves due to completion of pre-1998
tax audits
|
|
|
(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
|
|
|
(20 |
) |
|
|
30 |
|
|
|
32 |
|
|
Medicare reimbursement
|
|
|
(22 |
) |
|
|
— |
|
|
|
— |
|
|
Other adjustments
|
|
|
(2 |
) |
|
|
14 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total income tax provision (benefit)
|
|
$ |
4,070 |
|
|
$ |
(75 |
) |
|
$ |
129 |
|
| |
|
|
|
|
|
|
|
|
|
77
Deferred income tax assets and liabilities for 2004 and 2003
reflect the impact of temporary differences between amounts of
assets and liabilities for financial reporting purposes and the
bases of such assets and liabilities as measured by tax laws.
Temporary differences that gave rise to deferred tax assets and
liabilities included:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Deferred | |
|
Deferred | |
|
Deferred | |
|
Deferred | |
| |
|
Tax | |
|
Tax | |
|
Tax | |
|
Tax | |
| |
|
Assets | |
|
Liabilities | |
|
Assets | |
|
Liabilities | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Other postretirement benefits
|
|
$ |
2,523 |
|
|
$ |
— |
|
|
$ |
2,336 |
|
|
$ |
— |
|
|
Pension benefits
|
|
|
1,034 |
|
|
|
38 |
|
|
|
880 |
|
|
|
32 |
|
|
Other employee benefits
|
|
|
169 |
|
|
|
54 |
|
|
|
156 |
|
|
|
45 |
|
|
Depreciation
|
|
|
36 |
|
|
|
271 |
|
|
|
59 |
|
|
|
366 |
|
|
Tax on unremitted profits
|
|
|
— |
|
|
|
248 |
|
|
|
— |
|
|
|
181 |
|
|
Net operating loss carryforwards
|
|
|
1,241 |
|
|
|
— |
|
|
|
1,062 |
|
|
|
— |
|
|
General business credit carryforwards
|
|
|
328 |
|
|
|
— |
|
|
|
309 |
|
|
|
— |
|
|
Other U.S.
|
|
|
363 |
|
|
|
154 |
|
|
|
386 |
|
|
|
141 |
|
|
Other non-U.S.
|
|
|
89 |
|
|
|
63 |
|
|
|
53 |
|
|
|
83 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
5,783 |
|
|
|
828 |
|
|
|
5,241 |
|
|
|
848 |
|
|
Valuation allowances
|
|
|
(4,947 |
) |
|
|
— |
|
|
|
(206 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total deferred taxes
|
|
$ |
836 |
|
|
$ |
828 |
|
|
$ |
5,035 |
|
|
$ |
848 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
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 past three years, combined with the
deterioration in its current U.S. operating outlook for the near
to medium term that occurred in 2005, Delphi determined that it
could no longer support realization of such amounts under
Statement of Financial Accounting Standards (SFAS) No. 109
Accounting for Income Taxes. Accordingly, Delphi recorded
an additional $4,731 million valuation allowance on the
U.S. deferred tax assets as of December 31, 2004. Of this
amount, $4,667 million was recorded to income tax expense
and $64 million was recorded to other comprehensive income.
We continue to maintain the underlying tax benefits to offset
future taxable income and will monitor the need for a valuation
allowance based on the profitability of our U.S. operations. In
addition, there was a $10 million increase in valuation
allowances for certain non-US net deferred tax assets.
Delphi has deferred tax assets for net operating loss
(NOL) carryforwards of $151 million, net of a
valuation allowance of $1,090 million. Of this amount,
$953 million is related to the U.S. (subject to a full
valuation allowance) and expires in 2020 through 2024. The
remainder of this amount relates to foreign tax jurisdictions
with expiration dates ranging from one year to indefinite. With
respect to the U.S. NOL carryforwards, Delphi expects to
capitalize research and development (R&D) expenditures for
tax purposes in 2005 and prior years. The effect of this
capitalization will be to substantially eliminate the deferred
tax asset with respect to NOL carryforwards and to create a
deferred tax asset of similar amount 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.
Delphi has deferred tax assets for foreign tax credit
carryforwards of $64 million, charitable contribution
carryforwards of $5 million, capital loss carryforwards of
$7 million and general business credit carryforwards of
$328 million. The foreign tax credit carryforwards expire
in 2009 through 2014. The charitable contribution and capital
loss carryforwards expire in 2005 through 2009. The general
business
78
credit carryforwards expire in 2019 through 2024. Delphi has
recorded valuation allowances against all these carryforwards.
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 $234 million of cumulative
undistributed earnings of non-U.S. subsidiaries as of
December 31, 2004, 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 2004 through
indefinite. The income tax benefits attributable to these tax
credits and holidays are approximately $47 million ($0.08
per share) for 2004, $29 million ($0.05 per share) for 2003
and $17 million ($0.03 per share) for 2002. 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 considered sufficient to
pay assessments that may result from examination of prior year
tax returns; however, income tax accruals in the consolidated
balance sheets reflect that GM is responsible for assessments
related to tax returns for 1998, excluding Delphi Delco
Electronics and certain other limited contingencies.
Examinations of tax returns for years prior to 1998 have been
substantially settled.
Cash paid for income taxes, primarily foreign, was
$119 million, $122 million and $78 million in
2004, 2003 and 2002, respectively.
In October 2004, the American Jobs Creation Act of 2004
(“the Act”) was signed into law. The Act provides a
deduction, which will be phased in from 2005 through 2010, for
up to nine percent of the lesser of “qualified production
activities income” or taxable income. In return, the Act
also provides for a two-year phase-out of the existing
extraterritorial income exclusion (ETI) for foreign sales that
was viewed to be inconsistent with international trade protocols
by the European Union. Because Delphi currently has a net
operating loss (“NOL”) for tax purposes, we do not
expect the net effect of the phase out of the ETI and the phase
in of this new deduction to result in a significant impact on
the effective tax rate for fiscal years 2005 and 2006. In the
long-term, Delphi expects that the benefit of the new deduction
will be minimal since future U.S. taxable income will be
substantially eliminated due to future deductions for funding of
previously accrued pension obligations and other post employment
benefits.
Under the guidance in FASB Staff Position
No. SFAS 109-1, Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction
on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004, the deduction will be treated as a
“special deduction” as described in
SFAS No. 109. As such, the special deduction has no
effect on deferred tax assets and liabilities existing at the
enactment date. Rather, the impact of this deduction will be
reported in the period in which the deduction is claimed on our
tax return.
The Act also creates a temporary incentive for U.S. corporations
to repatriate earnings from foreign subsidiaries by providing an
85% dividends received deduction for certain dividends from
controlled foreign corporations to the extent the dividends
exceed a base amount and are invested in the U.S. pursuant to a
domestic reinvestment plan. The temporary incentive is available
to Delphi in 2005. The amount of Delphi’s dividends
potentially eligible for the deduction is limited to
$500 million. Delphi anticipates that it is unlikely that
it will elect to claim the 85% dividends received deduction
provided for under the Act, since such election would require
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.
79
Property, net consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, | |
| |
|
Estimated Useful | |
|
| |
| |
|
Lives (Years) | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
(in millions) | |
|
Land
|
|
|
— |
|
|
$ |
118 |
|
|
$ |
110 |
|
|
Land and leasehold improvements
|
|
|
3-31 |
|
|
|
246 |
|
|
|
242 |
|
|
Buildings
|
|
|
29-40 |
|
|
|
2,233 |
|
|
|
2,151 |
|
|
Machinery, equipment, tooling and spare parts
|
|
|
3-27 |
|
|
|
12,225 |
|
|
|
11,791 |
|
|
Furniture and office equipment
|
|
|
3-15 |
|
|
|
719 |
|
|
|
680 |
|
|
Construction in progress
|
|
|
— |
|
|
|
605 |
|
|
|
702 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
|
|
|
|
16,146 |
|
|
|
15,676 |
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
(10,200 |
) |
|
|
(9,277 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Total property, net
|
|
|
|
|
|
$ |
5,946 |
|
|
$ |
6,399 |
|
| |
|
|
|
|
|
|
|
|
|
Machinery, equipment and tooling at December 31, 2004 and
2003 included approximately $441 million and
$420 million, respectively, in Delphi-owned special tools.
In addition, the consolidated balance sheets include costs
incurred on customer-owned special tools subject to
reimbursement by customers of approximately $239 million
and $266 million as of December 31, 2004 and 2003,
respectively.
Losses related to the valuation of long-lived assets held for
use were charged to depreciation and amortization in the amounts
of $326 million and $58 million in 2004 and 2003,
respectively. See Note 3 Employee and Product Line Charges
for discussion of asset impairments recorded in conjunction with
the employee and product line charges recorded in 2004 and 2003.
At December 31, 2004 and December 31, 2003, our
purchased goodwill balance was approximately $798 million
and $773 million respectively, and was principally in the
Dynamics, Propulsion & Thermal (DPTI) sector.
Approximately $300 million of goodwill is tax deductible.
The change during the year 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.
The change in carrying amount of goodwill for the year ended
December 31, 2004 and 2003 is as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Goodwill, beginning balance
|
|
$ |
773 |
|
|
$ |
699 |
|
| |
Acquisitions
|
|
|
34 |
|
|
|
— |
|
| |
Impairment
|
|
|
(46 |
) |
|
|
— |
|
| |
Other (primarily currency translation)
|
|
|
37 |
|
|
|
74 |
|
| |
|
|
|
|
|
|
|
Balance at December 31,
|
|
$ |
798 |
|
|
$ |
773 |
|
| |
|
|
|
|
|
|
Pursuant to SFAS No. 142, “Goodwill and Other
Intangible Assets”, (SFAS 142) goodwill is required to
be tested for impairment annually at the reporting unit level.
In addition, goodwill should be
80
tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the
fair value of the reporting unit below its related carrying
value. As of year-end of 2004, we updated our annual goodwill
recoverability assessment to incorporate changes in market
conditions. This process included reviewing expectations for the
long-term growth of our businesses and forecasting future cash
flows. During this assessment we identified certain factors,
primarily reductions in production volumes and higher commodity
costs that caused us to lower our estimated future cash flows.
The reduced future cash flows indicated that it is more likely
than not that the fair value of two reporting units within the
DPTI sector was less than its carrying value. Accordingly, we
recorded an impairment charge of $46 million to reduce the
carrying value of goodwill to its estimated implied fair value.
We are in the process of finalizing our assessment of the fair
value of the reporting units impacted utilizing the assistance
of third party valuation experts. The estimated goodwill
impairment charge has been included in depreciation and
amortization expense on the consolidated statements of
operations. Any adjustment to the estimated impairment loss will
be recognized in depreciation and amortization expense in a
subsequent reporting period.
The 2004 goodwill impairment charge is primarily attributable to
a decrease in the reporting units estimated fair values based
upon the effect of market conditions on current operating
results and on management’s projections of future financial
performance, specifically lower North American vehicle
production levels and higher commodity costs. The discounted
cash flows were estimated using internal budget information
based on recent sales data and production volume estimates.
Further changes in economic or operating conditions impacting
these estimates could result in additional goodwill impairment
charges.
Accrued liabilities consisted of:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Payroll related obligations
|
|
$ |
231 |
|
|
$ |
195 |
|
|
Employee benefits, including current pension obligations
|
|
|
1,091 |
|
|
|
738 |
|
|
Income taxes payable
|
|
|
117 |
|
|
|
60 |
|
|
Taxes other than income
|
|
|
195 |
|
|
|
217 |
|
|
Warranty obligations
|
|
|
226 |
|
|
|
165 |
|
|
Employee and product line charges
|
|
|
140 |
|
|
|
251 |
|
|
Other
|
|
|
694 |
|
|
|
1,058 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
2,694 |
|
|
$ |
2,684 |
|
| |
|
|
|
|
|
|
The table below summarizes the activity in the product warranty
liability for the years ended December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Accrual balance at beginning of year
|
|
$ |
258 |
|
|
$ |
276 |
|
| |
Provision for estimated warranties accrued during the year
|
|
|
86 |
|
|
|
86 |
|
| |
Accruals for pre-existing warranties (including changes in
estimates)
|
|
|
53 |
|
|
|
9 |
|
| |
Settlements made during the year (in cash or in kind)
|
|
|
(126 |
) |
|
|
(124 |
) |
| |
Foreign currency translation
|
|
|
3 |
|
|
|
11 |
|
| |
|
|
|
|
|
|
|
Accrual balance at end of year
|
|
$ |
274 |
|
|
$ |
258 |
|
| |
|
|
|
|
|
|
81
Approximately $226 million and $165 million of the
warranty accrual balance as of December 31, 2004 and
December 31, 2003, respectively is included in accrued
liabilities in the accompanying consolidated balance sheet. The
remainder of the warranty accrual balance is included in other
long-term liabilities.
Debt is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Commercial paper program
|
|
$ |
330 |
|
|
$ |
110 |
|
|
6.125%, unsecured notes, due 2004
|
|
|
— |
|
|
|
500 |
|
|
6.55%, unsecured notes, due 2006
|
|
|
500 |
|
|
|
500 |
|
|
6.50%, unsecured notes, due 2009
|
|
|
498 |
|
|
|
498 |
|
|
6.50%, unsecured notes, due 2013
|
|
|
495 |
|
|
|
494 |
|
|
7.125%, debentures, due 2029
|
|
|
496 |
|
|
|
496 |
|
|
Capital leases and other
|
|
|
249 |
|
|
|
446 |
|
| |
|
|
|
|
|
|
| |
Total debt
|
|
|
2,568 |
|
|
|
3,044 |
|
|
Less: current portion
|
|
|
(507 |
) |
|
|
(892 |
) |
| |
|
|
|
|
|
|
| |
Long-term debt
|
|
$ |
2,061 |
|
|
$ |
2,152 |
|
| |
|
|
|
|
|
|
In 2004, Delphi maintained $2.9 billion of worldwide
commercial paper programs. Interest rates under these programs
are determined based on the prevailing market rates at the time
of issuing commercial paper. Borrowings under these programs are
for a maximum of 365 days and are classified as short-term
debt in the consolidated balance sheet. As a result of our
short-term credit ratings, B3/ NP/ WR as of June 30, 2005,
we do not have access to the commercial paper market. As of
December 31, 2004, $0.3 billion was outstanding under
the commercial paper program with a weighted average interest
rate of 2.6%. As of December 31, 2003, $0.1 billion
was outstanding under the commercial paper program with a
weighted average interest rate of 1.5%.
Delphi had two financing arrangements with a syndicate of
lenders providing for an aggregate of $3.0 billion in
available revolving credit facilities (the “Credit
Facilities”), reduced by the amount of any outstanding
letters of credit. The terms of the Credit Facilities provide
for a five-year revolving credit line in the amount of
$1.5 billion, which was renewed in 2004 and now expires in
June 2009, and a 364-day revolving credit line in the amount of
$1.5 billion, which was renewed in 2004 and expired in June
2005. We have never borrowed under either of these Credit
Facilities. However, Delphi had approximately $57 million
in letters of credit outstanding against the Credit Facilities
as of December 31, 2004. Our Credit Facilities also
contained certain affirmative and negative covenants including a
financial covenant requirement for a debt to EBITDA coverage
ratio not to exceed 3.25 to 1.0 at December 31, 2004. In
addition, certain of our lease facilities discussed below
contain cross-default provisions to our Credit Facilities. We
were in compliance with the financial covenant and all other
covenants as of December 31, 2004 and the amended covenants
as of March 31, 2005.
We have outstanding publicly held unsecured term debt securities
totaling approximately $2.0 billion. In July 2003, we
issued 6.50% unsecured notes with an aggregate principal amount
of $500 million, which mature on August 15, 2013. We
pay interest on these notes semi-annually on February 15 and
August 15 of each year, which began February 15, 2004. Our
next maturity of $500 million of long-term unsecured debt
comes due on June 15, 2006, and bears interest at 6.55%
with interest payable semi-annually on June 15 and December 15
of each year. Thereafter, we have $500 million of
securities bearing interest at 6.50% and maturing on May 1,
2009, and $500 million of securities bearing interest at
7.125% and maturing on
82
May 1, 2029. Interest on these debt securities is 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.
As of December 31, 2004 and 2003, Delphi also had other
debt outstanding and capital lease obligations of approximately
$249 million and $446 million, respectively, which
includes debt issued by certain international subsidiaries,
factoring of accounts receivable by certain international
subsidiaries, indirect material financing and amounts due under
a trade payables program with General Electric Capital
Corporation (“GECC”). We maintained a program with
GECC that allows some of our suppliers to factor their
receivables from us to GECC for early payment. This program also
allowed us to have GECC pay our suppliers on our behalf,
providing extended payment terms to us. Amounts outstanding
under the GECC trade payable program were $8 million and
$168 million at December 31, 2004 and 2003,
respectively. There were no payables beyond their stated terms
at December 31, 2004 and 2003.
As of December 31, 2004, Delphi had approximately
$350 million available under uncommitted lines of credit.
Interest rates under these lines of credit are determined at the
time of borrowing based on the underlying bank rates. Borrowings
under these lines are generally due within 180 days and are
classified as short-term debt in the consolidated balance sheet.
As of December 31, 2004 and 2003, $7 million and
$9 million, respectively, were outstanding under
uncommitted lines of credit. Due to our current credit rating,
Delphi’s access to uncommitted lines of credit has declined.
On March 28, 2005, Delphi reached agreement with its
syndicate of lenders to amend certain terms of its
$3.0 billion revolving credit facilities including its
EBITDA coverage ratio. Delphi also agreed to the elimination of
its option to extend repayment for up to one year beyond the
expiration date of its 364-day revolving credit line for any
amounts outstanding on the expiration date. Additionally, the
syndicate of lenders waived Delphi’s obligation to provide
audited financial statements for the year ended
December 31, 2004 until June 30, 2005.
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”). As
previously announced, upon the effectiveness of the new
Facilities, Delphi terminated its 364-day revolving credit
facility in the amount of $1.5 billion.
The Term Loan requires interest payments during the term at a
variable interest rate of 650 basis points above the
Eurodollar base rate, which is the London Interbank Borrowing
Rate (“LIBOR”). On June 14, 2005, one-month LIBOR
was 3.2% per annum. The LIBOR interest rate period can 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 LIBOR through the term of the loan. The Term Loan
has a 1% per annum amortization for the first 5 years
and 9 months. The then outstanding principal and any
accrued and unpaid interest is due in full at the end of term,
on June 14, 2011. The Term Loan is not repayable in the
first year and, in accordance with the terms of the Facilities,
during the second and third year is subject to call premiums on
the balance outstanding of 2% and 1%, respectively. After the
third year, the then outstanding Term Loan principal is
repayable without premium or penalty.
The Revolving Credit Facility carries a variable interest rate
of 500 basis points above LIBOR on outstanding borrowings
subject to adjustment based on Delphi’s credit ratings. The
Revolving Credit Facility has a commitment fee payable on the
unused portion of 50 bps per annum, which is also subject
to adjustment based upon Delphi’s credit ratings. Each of
the interest rates on borrowings and the commitment fee under
the Revolving Credit Facility is adjustable and will fluctuate
as described for the Term Loan. The Revolving Credit Facility
will expire June 18, 2009. Borrowings under the Revolving
Credit Facility are prepayable at Delphi’s option without
premium or penalty.
83
The Facilities provide 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) and further provides that amounts borrowed
under the Facilities will 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
is limited by a borrowing base computation. The borrowing base
is 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 limit 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 is secured by such
assets (together with other borrowings which are secured by such
assets and obligations in respect of certain sale-leaseback
transactions) will not exceed 15% of Consolidated Net Tangible
Assets (as defined in the indenture applicable to Delphi’s
outstanding bonds and debentures).
The amended Facilities contain financial covenants based on
consolidated leverage ratios, which are 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 cannot 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. Further, the syndicate of
lenders waived Delphi’s obligation to provide audited
financial statements for the year ended December 31, 2004
until September 30, 2005, and agreed not to consider any
inaccuracy of Delphi’s non-GAAP measures of net liquidity
as disclosed in Delphi’s Form 8-K Current Report filed
with the Securities and Exchange Commission on June 9, 2005
as a material adverse change.
Cash paid for interest totaled $245 million,
$193 million and $210 million in 2004, 2003 and 2002,
respectively.
The principal maturities of debt, net of applicable discount and
issuance costs, and the minimum capital lease obligations for
the five years subsequent to 2004 are as follows:
| |
|
|
|
|
|
| |
|
Debt and | |
| |
|
Capital Lease | |
| Year |
|
Obligations | |
| |
|
| |
| |
|
(in millions) | |
|
2005
|
|
|
507 |
|
|
2006
|
|
|
516 |
|
|
2007
|
|
|
14 |
|
|
2008
|
|
|
23 |
|
|
2009
|
|
|
502 |
|
|
Thereafter
|
|
|
1,006 |
|
| |
|
|
|
| |
Total
|
|
$ |
2,568 |
|
| |
|
|
|
84
|
|
| 11. |
JUNIOR SUBORDINATED NOTES DUE TO DELPHI TRUST I
AND II |
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 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. Delphi
has the ability to defer interest payments on the Trust I
notes at any time for up to 20 consecutive quarterly periods. If
Delphi elects to defer interest payments, Trust I will also
defer payment on preferred distributions, however, additional
distributions will accumulate on the deferred distributions at
an annual rate equal to
81/4%
compounded quarterly. In addition, Delphi has 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 may redeem
the Trust I notes, if an adverse tax consequence occurs. In
the event that Delphi elects to redeem the Trust I notes,
Trust I will be required to redeem an equivalent amount of
its preferred common securities at their liquidation amount plus
any accrued and unpaid distributions.
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. Delphi has
the ability to defer interest payments on the Trust II
notes at any time for up to five years at a time. If Delphi
elects to defer interest payments, Trust II will also defer
payment on preferred distributions, however, additional
distributions will accumulate on the deferred distributions at
the applicable distribution rate. In addition, Delphi has 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
also may redeem the Trust II notes in whole, but not in
part, if an adverse tax consequence occurs. In the event that
Delphi elects to redeem the Trust II notes, Trust II
will be required to redeem an equivalent amount of its preferred
common securities at their liquidation amount plus any accrued
and unpaid distributions.
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.
Accounting Treatment
We have determined that both Trust I and Trust II are
considered variable interest entities, of which we are not the
primary beneficiaries. As a result, although both Trust I
and Trust II are 100% owned by us, we do not consolidate
them into our financial statements. However, the Trust I
and Trust II notes are reflected as long-term debt on our
consolidated balance sheet and the related interest is included
as a component of interest expense on our Statement of
Operations. If Trust I and Trust II were consolidated
by us, our other long term assets and debt would each be
$12 million less as of December 31, 2004 but there
would be no significant impact on interest expense for the year
ended December 31, 2004.
85
|
|
| 12. |
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, and are generally not significant to
Delphi. 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.
The 2004 and 2003 amounts shown below reflect the defined
benefit pension and other postretirement benefit obligations
(“OPEB”) for U.S. salaried and hourly employees.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Other Postretirement | |
| |
|
Pension Benefits | |
|
Benefits | |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Benefit obligation at beginning of year
|
|
$ |
11,413 |
|
|
$ |
9,712 |
|
|
$ |
8,469 |
|
|
$ |
6,872 |
|
| |
|
Service cost
|
|
|
284 |
|
|
|
261 |
|
|
|
176 |
|
|
|
168 |
|
| |
|
Interest cost
|
|
|
699 |
|
|
|
643 |
|
|
|
498 |
|
|
|
459 |
|
| |
|
Actuarial losses
|
|
|
920 |
|
|
|
667 |
|
|
|
1,141 |
|
|
|
1,083 |
|
| |
|
Benefits paid
|
|
|
(472 |
) |
|
|
(375 |
) |
|
|
(154 |
) |
|
|
(120 |
) |
| |
|
Special termination benefits
|
|
|
7 |
|
|
|
6 |
|
|
|
2 |
|
|
|
— |
|
| |
|
Flowbacks to GM
|
|
|
— |
|
|
|
— |
|
|
|
(72 |
) |
|
|
70 |
|
| |
|
Plan amendments and other
|
|
|
21 |
|
|
|
499 |
|
|
|
(455 |
) |
|
|
(63 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Benefit obligation at end of year
|
|
|
12,872 |
|
|
|
11,413 |
|
|
|
9,605 |
|
|
|
8,469 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at beginning of year
|
|
|
7,437 |
|
|
|
5,628 |
|
|
|
— |
|
|
|
— |
|
| |
|
Actual return on plan assets
|
|
|
938 |
|
|
|
1,176 |
|
|
|
— |
|
|
|
— |
|
| |
|
Contributions
|
|
|
600 |
|
|
|
990 |
|
|
|
154 |
|
|
|
120 |
|
| |
|
Benefits paid
|
|
|
(472 |
) |
|
|
(375 |
) |
|
|
(154 |
) |
|
|
(120 |
) |
| |
|
Other
|
|
|
23 |
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at end of year, including
$0.4 million and $0.3 million of Delphi common stock
at December 31, 2004 and 2003, respectively
|
|
|
8,526 |
|
|
|
7,437 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Underfunded status
|
|
|
(4,346 |
) |
|
|
(3,976 |
) |
|
|
(9,605 |
) |
|
|
(8,469 |
) |
| |
Unamortized actuarial loss
|
|
|
3,912 |
|
|
|
3,350 |
|
|
|
3,000 |
|
|
|
2,425 |
|
| |
Unamortized prior service cost
|
|
|
1,018 |
|
|
|
1,142 |
|
|
|
(50 |
) |
|
|
(55 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in consolidated balance sheets
|
|
$ |
584 |
|
|
$ |
516 |
|
|
$ |
(6,655 |
) |
|
$ |
(6,099 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accrued benefit liability
|
|
$ |
(3,858 |
) |
|
$ |
(3,575 |
) |
|
$ |
(6,655 |
) |
|
$ |
(6,099 |
) |
| |
Intangible asset
|
|
|
1,018 |
|
|
|
1,142 |
|
|
|
— |
|
|
|
— |
|
| |
Accumulated other comprehensive income (pre-tax)
|
|
|
3,424 |
|
|
|
2,949 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
584 |
|
|
$ |
516 |
|
|
$ |
(6,655 |
) |
|
$ |
(6,099 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
86
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for U.S. pension
plans with accumulated benefit obligations in excess of plan
assets were $12.8 billion, $12.4 billion and
$8.5 billion, respectively, as of December 31, 2004
and $11.4 billion, $11.0 billion and
$7.4 billion, respectively, as of December 31, 2003.
In 2003, Delphi entered into new labor contracts with the UAW
and IUE, covering the period from 2003 to 2007. The impact of
the 2003 contracts on the pension liability was a
$0.5 billion increase to our projected benefit obligation.
In accordance with requirements under applicable U.S. laws,
we contributed approximately $0.6 billion to the
U.S. pension plans in the second quarter of 2005.
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. The
projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for non-U.S. plans with plan
assets in excess of accumulated benefits were $418 million,
$319 million, and $335 million, respectively, as of
December 31, 2004, and $330 million,
$245 million, and $268 million, respectively, as of
December 31, 2003. The projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for
non-U.S. plans with accumulated benefits in excess of plan
assets were $779 million, $714 million, and
$395 million, respectively, as of December 31, 2004
and $661 million, $600 million, and $339 million,
respectively, as of December 31, 2003. In aggregate, the
under-funded status, on a projected benefit obligation basis,
for non-U.S. plans was $(467) million and
$(384) million at December 31, 2004 and 2003,
respectively. Other comprehensive income at December 31,
2004 and 2003 includes a minimum pension liability adjustment
relating to non-U.S. pension plans of $220 million and
$191 million, respectively. 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
pension and other postretirement benefit plans was not
significant to Delphi.
We also sponsor defined contribution plans for certain U.S. and
non-U.S. hourly and salary employees. During 2004, 2003 and
2002, expenses incurred related to our contributions to these
plans were not material.
We were required at December 31, 2004 and 2003 to adjust
the minimum pension liability recorded in our consolidated
balance sheet for both U.S. and non-U.S. plans. In 2004,
the effect of this adjustment was to increase pension
liabilities by $0.3 billion, increase our deferred income
taxes by $0.1 billion (before consideration of a valuation
allowance), increase accumulated other comprehensive loss by
$0.3 billion and decrease intangible assets by
$0.1 billion. In 2003, the effect of this adjustment was to
increase pension liabilities by $0.4 billion and intangible
assets by $0.4 billion. Because these adjustments were
non-cash, the effect has been excluded from the accompanying
Consolidated Statements of Cash Flows.
Benefit costs presented below were determined based on actuarial
methods and included the following components for
U.S. salaried and hourly employees:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Other Postretirement | |
| |
|
Pension Benefits | |
|
Benefits | |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Service cost
|
|
$ |
284 |
|
|
$ |
261 |
|
|
$ |
255 |
|
|
$ |
176 |
|
|
$ |
168 |
|
|
$ |
147 |
|
|
Interest cost
|
|
|
699 |
|
|
|
643 |
|
|
|
603 |
|
|
|
498 |
|
|
|
459 |
|
|
|
405 |
|
|
Expected return on plan assets
|
|
|
(722 |
) |
|
|
(647 |
) |
|
|
(692 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Special termination benefits
|
|
|
7 |
|
|
|
6 |
|
|
|
26 |
|
|
|
2 |
|
|
|
— |
|
|
|
5 |
|
|
Amortization of prior service costs
|
|
|
139 |
|
|
|
91 |
|
|
|
92 |
|
|
|
(5 |
) |
|
|
1 |
|
|
|
(9 |
) |
|
Amortization of losses (gains)
|
|
|
142 |
|
|
|
108 |
|
|
|
9 |
|
|
|
121 |
|
|
|
73 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net periodic benefit cost
|
|
$ |
549 |
|
|
$ |
462 |
|
|
$ |
293 |
|
|
$ |
792 |
|
|
$ |
701 |
|
|
$ |
550 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
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. pension plan and
postretirement plans were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Other Postretirement | |
| |
|
Pension Benefits | |
|
Benefits | |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Weighted-average discount rate
|
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
|
Weighted-average rate of increase in compensation levels
|
|
|
4 |
% |
|
|
4 |
% |
|
|
4.5 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
Expected long-term rate of return on plan assets
|
|
|
9 |
% |
|
|
9 |
% |
|
|
10 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
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 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 6.25% for 2003 to 5.75% for 2004. This
50 basis point decline in the discount rate increased the
underfunded status of our U.S. pension plans by
approximately $0.7 billion. The OPEB discount rate
determined on that basis decreased from 6.25% for 2003 to 6.00%
for 2004. This 25 basis point decline in the discount
rate increased the underfunded status of our U.S. OPEB
plans by approximately $0.3 billion.
For 2004, Delphi assumed a long-term asset rate of return of 9%.
In developing the 9% expected long-term rate of return
assumption, we evaluated input from our third party pension plan
asset managers, including their 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 in line with
our long-term rate of return assumption.
As required by generally accepted accounting principles, our
pension expense for 2005 is determined at the end of December
2004. However, for purposes of analysis, the following table
highlights the sensitivity of our 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 |
|
— |
88
Our pension plan asset allocation at December 31, 2004,
2003, and target allocation for 2005 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Percentage of | |
|
|
| |
|
Plan Assets at | |
|
Target | |
| |
|
December 31, | |
|
Allocation | |
| |
|
| |
|
| |
| Asset Category |
|
2004 | |
|
2003 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
Equity Securities
|
|
|
61 |
% |
|
|
59 |
% |
|
|
50% - 75% |
|
|
Fixed Income
|
|
|
32 |
% |
|
|
30 |
% |
|
|
25% - 40% |
|
|
Real Estate
|
|
|
6 |
% |
|
|
10 |
% |
|
|
5% - 9% |
|
|
Other
|
|
|
1 |
% |
|
|
1 |
% |
|
|
0% - 2% |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
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. During 2003, we
entered into a risk reduction program to reduce our exposure to
developed market equities. The goal of the program was to reduce
the potential impact to our funded status of a downturn in
developed market equity returns. This program was discontinued
in the beginning of 2004.
National union negotiations allow for some of our 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 our company to the extent
job openings become available at our 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 us
with respect to such employees that transfer between our
companies. The company to which the employee transfers will be
responsible for the related OPEB obligation. An agreement with
GM provides for a mechanism for determining a cash settlement
amount for OPEB obligations associated with employees that
transfer between GM and Delphi.
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Projected OPEB | |
|
|
| |
|
Projected Pension | |
|
Benefit Payments | |
|
Projected Medicare | |
| |
|
Benefit Payments | |
|
(Pre-Medicare) | |
|
Subsidy Receipts | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
2005
|
|
$ |
556 |
|
|
$ |
216 |
|
|
$ |
— |
|
|
2006
|
|
|
643 |
|
|
|
262 |
|
|
|
(4 |
) |
|
2007
|
|
|
726 |
|
|
|
309 |
|
|
|
(5 |
) |
|
2008
|
|
|
815 |
|
|
|
360 |
|
|
|
(7 |
) |
|
2009
|
|
|
899 |
|
|
|
411 |
|
|
|
(8 |
) |
|
2010 — 2014
|
|
$ |
5,127 |
|
|
$ |
2,680 |
|
|
$ |
(81 |
) |
In accordance with our Separation agreement with GM, we will be
paying an average of $77 million per year from our OPEB
liability (flowbacks) over the next five years to GM. In
addition to this, we are also required to make a final
settlement payment of approximately $0.3 billion in 2014.
Our annual measurement dates are December 31 and
September 30 for our pension benefits and other
postretirement benefits, respectively. For OPEB measurement
purposes, a 10% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2005. The rate
was
89
assumed to decrease on a gradual basis through 2010, to the
ultimate weighted-average trend rate of approximately 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 our OPEB liability was
$0.5 billion and is being accounted for as an actuarial
gain, in accordance with guidance from the Financial Accounting
Standards Board (“FASB”). As a result, the gain will
be amortized as a reduction of our periodic expense and balance
sheet liability over the next ten to twelve years, depending on
the terms of the individual plans. OPEB expense during the 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 FASB Staff Position
(“FSP”) 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 our normal
measurement date for our OPEB obligation is September 30 of
each year, FSP 106-2 required a one-quarter lag from the
remeasurement date (December 8, 2003) before applying the
effects of the Act. In connection with our adoption of the
provisions of FSP 106-2 in the third quarter of 2004 we
retroactively reduced our net income for the three months ended
March 31, 2004 by $7 million and increased our net
income for the three months ended June 30, 2004 by
$2 million. The adoption of FSP 106-2 does not impact our
net income for any period in 2003 nor has it impacted the
$0.5 billion reduction to our actuarial liability. The
restated financial statements reflect the impact of the adoption
of FSP 106-2.
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 expected impact of this amendment will
be a decrease in the OPEB 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 will begin in June 2005.
90
As required by generally accepted accounting principles, our
OPEB expense for 2005 is determined at the 2004 measurement
date. However, for purposes of analysis, the following table
highlights the sensitivity of our OPEB obligations and expense
to changes in assumptions:
| |
|
|
|
|
| |
|
Impact on |
|
Impact on |
| Change in Assumption |
|
OPEB Expense |
|
OPEB 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 |
|
|
| Note: |
This analysis excludes any impact of the amendment to the
Salaried OPEB plan. |
For analytical purposes only, the following table presents the
impact that changes in our health care trend rate would have on
our OPEB liability and OPEB service and interest cost (in
millions):
| |
|
|
|
|
|
|
|
|
| |
|
Impact on Service | |
|
Impact on | |
| % Change |
|
& Interest Cost | |
|
OPEB Liability | |
| |
|
| |
|
| |
|
+ 1%
|
|
$ |
130 |
|
|
$ |
1,398 |
|
|
- 1%
|
|
$ |
(96 |
) |
|
$ |
(1,151 |
) |
|
|
| Note: |
This analysis excludes any impact of the amendment to the
Salaried OPEB plan. |
|
|
| 13. |
COMMITMENTS AND CONTINGENCIES |
Ongoing SEC Investigation
Delphi is the subject of an ongoing investigation by the Staff
of the Securities Exchange Commission (“SEC”) and
other federal authorities involving Delphi’s accounting and
adequacy of disclosures for a number of transactions. The
transactions being investigated include transactions in which
Delphi received rebates or other lump-sum payments from
suppliers, certain off-balance sheet financings of indirect
materials and inventory, and the payment in 2000 of
$237 million in cash, and the subsequent receipt in 2001 of
$85 million in credits, as a result of certain settlement
agreements entered into between Delphi and its former parent
company, General Motors. Delphi’s Audit Committee has
completed its internal investigation of these transactions and
concluded that many were accounted for improperly.
Contemporaneously with this filing, Delphi has filed amended
quarterly reports on Form 10-Q/ A for the first and second
quarters of 2004 and quarterly report on Form 10-Q for the
third quarter of 2004, which also contain restated financial
statements. Delphi expects to file its quarterly report on
Form 10-Q for the quarter ended March 31, 2005 on or
before June 30, 2005 and thus to become current in its
filings with the SEC.
Delphi is fully cooperating with the SEC’s ongoing
investigation and requests for information as well as the
related investigation being conducted by the Department of
Justice. The Company has entered into an agreement with the SEC
to suspend the running of the applicable statute of limitations
until April 6, 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.
Shareholder Lawsuits
Several class action lawsuits have been commenced against
Delphi, several of Delphi’s subsidiaries, certain of its
current and former directors and officers of Delphi, General
Motors Management Corporation (the named fiduciary for
investment purposes and investment manager to Delphi’s
employee benefit plans), and several current and former
employees of Delphi or Delphi’s subsidiaries, as a result
of its announced intention to restate its originally issued
financial statements. These lawsuits fall into three categories.
One group has been brought under the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”),
purportedly on behalf of participants in certain of the
Company’s and its subsidiaries’ defined contribution
employee benefit pension plans who invested in the Delphi
Corporation Common Stock Fund. Plaintiffs allege that the plans
suffered losses due to the defendants’ breaches of
fiduciary duties under ERISA. To date, the Company has received
service in five such lawsuits and is
91
aware of an additional eleven that are pending. All pending
cases have been filed in U.S. District Court for the
Eastern District of Michigan.
The second group of purported class action lawsuits variously
alleges that the Company and certain of its current and former
directors and officers made materially false and misleading
statements in violation of federal securities laws. To date, the
Company has been served in six such lawsuits and is aware of
eight additional lawsuits. The lawsuits have been filed in the
U.S. District Court for the Eastern District of Michigan,
the U.S. District Court for the Southern District of New
York, and the U.S. District Court for Southern District of
Florida.
The third group of lawsuits pertains to two shareholder
derivative cases and a demand. To date, certain current and
former directors and officers have been named in two such
lawsuits. One has been served in Oakland County Circuit Court in
Pontiac, Michigan, and a second is pending in the
U.S. District Court for the Southern District of New York.
In addition, the Company has received a demand letter from a
shareholder requesting that the Company consider bringing a
derivative action against certain current and former officers.
The derivative lawsuits and the request demand the Company
consider further derivative action premised on allegations that
certain current and former officers made materially false and
misleading statements in violation of federal securities laws.
The Company has appointed a special committee of the Board of
Directors to consider the demand request.
Due to the preliminary nature of these cases, the Company is not
able to predict with certainty the outcome of this litigation or
its potential exposure related thereto. Although Delphi believes
that any loss that the Company would suffer under such lawsuits
should, after payment of a $10 million deductible, be
covered by its director and officer insurance policy, it cannot
assure you that the impact of any loss not covered by insurance
or applicable reserves would not be material. Delphi has
recorded a reserve related to these lawsuits equal to the amount
of its insurance deductible.
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 potentially responsible
party (“PRP”) in proceedings at various sites,
including the Tremont City Landfill Site located in Tremont,
Ohio which is alleged to concern 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 and 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.
With respect to warranty matters, 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.
92
With respect to intellectual property matters, on
September 7, 2004, we received the arbitrator’s
binding decision resolving a dispute between Delphi and Litex.
In May 2001, Litex had filed suit against Delphi in federal
court in the District of Massachusetts alleging 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 federal
court for the District of Massachusetts seeking declaratory
relief to enforce the parties’ agreement in the original
case prohibiting Litex from bringing such claims. On
March 28, 2005, Litex countersued asserting various tort
claims against Delphi and requesting that the court void aspects
of the parties’ agreement in the original case. This matter
remains pending before the federal court for the District of
Massachusetts.
Additionally, as previously disclosed, we have been mediating a
number of patent disputes regarding vehicle occupant detection
technologies with Takata Corporation and its subsidiaries. On
December 1, 2004, the parties resolved these disputes to
their mutual satisfaction by entering into a cross-license
agreement concerning various patents in the field of vehicle
occupant detection technologies.
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 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.
In May 2003, the Ninth Circuit Court of Appeals affirmed the
federal district court’s decision to award one of our
former suppliers approximately $38 million
($25 million after-tax), inclusive of accrued interest, in
connection with a commercial dispute. The settlement was paid
during the third quarter of 2003.
Contingent Financing Obligations
Rental expense totaled $192 million, $162 million and
$154 million for the years ended December 31, 2004,
2003 and 2002, respectively. We have leased certain property,
primarily land and buildings that are used in our operations,
under leases commonly known as synthetic leases. The leases,
which have been accounted for as operating leases, provide us
tax treatment equivalent to ownership, and also provide us with
the option to purchase these properties at any time during the
term or to cause the properties to be remarketed upon lease
expiration. The leases also provide that if we do not exercise
our purchase option upon expiration of the term and instead
elect our remarketing option, we would pay any difference
between the purchase option amount and the proceeds of
remarketing, up to a maximum of approximately $89 million.
At December 31, 2004, the aggregate fair value of these
properties exceeded the minimum value guaranteed upon exercise
of the remarketing option. As of December 31, 2004, the
recorded estimate of the fair value of the residual value
guarantee related to these leases was approximately
$2 million. Under the terms of the lease agreements, we
also provide certain indemnities to the lessor, including
environmental indemnities. In addition, the leases contain
certain covenants, including a financial covenant requirement
that our debt to EBITDA coverage ratio, as defined in the
agreement, not exceed 3.25 to 1. Unlike the Credit Facilities,
this financial covenant has not been amended. In the event of a
default of the terms of the leases, the lessors have the right
to notify us of their election to require that we purchase the
synthetically leased properties, which would require us to pay
the aggregate purchase price of approximately $131 million.
Though we were in compliance with our financial covenants at
December 31, 2004, our audited financials indicate that at
March 31, 2005, our debt to EBITDA coverage ratio exceeded
3.25 to 1. Although we have received no notices from the lessors
of their election to obligate us to purchase the synthetically
leased properties, in June we commenced the process of
exercising our purchase options. As a result, we completed the
purchase of our headquarters property and two manufacturing
facilities in the State of Alabama for approximately
$103 million on June 28, 2005. The purchase of the
second facility, for approximately $28 million, has not yet
been completed.
93
We also from time to time, enter into arrangements with
suppliers or other parties that result in variable interest
entities as defined by FASB Interpretation No. 46,
“Consolidation of Variable Interest Entities”
(“FIN 46”). At December 31, 2004, we had one
variable interest entity (“VIE”), which is a supplier
to one of our U.S. facilities. Our arrangement with this
supplier is to reimburse it for losses incurred related to
materials supplied to us and to receive a refund for any profits
that it makes as it relates to material supplied to us. This
arrangement is in effect through 2007. In 2004, this VIE had
sales of approximately $10 million, 69% of which were to
Delphi. This supplier has approximately $4 million in
assets and $4 million in liabilities; the latter of which
include a loan of approximately $2.7 million from Delphi.
This VIE does not have any other means of support other than
Delphi. As required under FIN 46, we have consolidated this
entity and eliminated all intercompany transactions. Given the
nature of our relationship with this VIE, it is not possible to
estimate the maximum amount of our exposure or the fair value.
However, we do not expect such amounts, if any, to be material.
As of December 31, 2004, Delphi had minimum lease
commitments under noncancelable operating leases totaling
$507 million, which become due as follows:
| |
|
|
|
|
|
| |
|
Minimum Future | |
| |
|
Operating Lease | |
| Year |
|
Commitments | |
| |
|
| |
| |
|
(in millions) | |
|
2005
|
|
|
140 |
|
|
2006
|
|
|
111 |
|
|
2007
|
|
|
84 |
|
|
2008
|
|
|
60 |
|
|
2009
|
|
|
42 |
|
|
Thereafter
|
|
|
70 |
|
| |
|
|
|
| |
Total
|
|
$ |
507 |
|
| |
|
|
|
Concentrations of Risk
The majority of our U.S. hourly workforce is represented by
two unions, the UAW (approximately 72%) and the IUE-CWA
(approximately 24%).
|
|
| 14. |
INVESTMENTS IN AFFILIATES |
As part of our operations, we have investments in 21
non-consolidated affiliates. These affiliates, the most
significant of which are Korea Delphi Automotive Systems
Corporation, PBR Knoxville, LLC., Ambrake Corporation, and
Promotora de Partes Electricas Automotrices, S.A. de C.V., are
not publicly traded companies. Our affiliates are located
primarily in Korea, China, U.S., Mexico, Japan, India, Spain,
Saudi Arabia and Belgium. Our ownership percentages vary from
approximately 20% to 50%. Our aggregate investment in
non-consolidated affiliates was $496 million and
$431 million at December 31, 2004 and 2003,
respectively, and is included in other long-term assets.
94
The following is a summary of the financial information for our
significant affiliates accounted for under the equity method as
of December 31, 2004 and 2003 and for the years ended
December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Current assets
|
|
$ |
1,043 |
|
|
$ |
849 |
|
|
Noncurrent assets
|
|
|
778 |
|
|
|
736 |
|
| |
|
|
|
|
|
|
| |
Total assets
|
|
$ |
1,821 |
|
|
$ |
1,585 |
|
| |
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
690 |
|
|
$ |
592 |
|
|
Noncurrent liabilities
|
|
|
180 |
|
|
|
183 |
|
|
Stockholders’ Equity
|
|
|
951 |
|
|
|
810 |
|
| |
|
|
|
|
|
|
| |
Total liabilities and stockholders’ equity
|
|
$ |
1,821 |
|
|
$ |
1,585 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Net sales
|
|
$ |
2,584 |
|
|
$ |
2,299 |
|
|
$ |
2,041 |
|
|
Gross profit
|
|
$ |
431 |
|
|
$ |
406 |
|
|
$ |
323 |
|
|
Net income (loss)
|
|
$ |
193 |
|
|
$ |
171 |
|
|
$ |
(16 |
) |
A summary of transactions with affiliates is shown below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Sales to affiliates
|
|
$ |
49 |
|
|
$ |
37 |
|
|
$ |
33 |
|
|
Purchases from affiliates
|
|
$ |
493 |
|
|
$ |
525 |
|
|
$ |
486 |
|
|
|
| 15. |
OTHER INCOME (EXPENSE), NET |
Other income (expense), net included:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Claims and commissions
|
|
$ |
20 |
|
|
$ |
27 |
|
|
$ |
45 |
|
|
Interest income
|
|
|
24 |
|
|
|
22 |
|
|
|
19 |
|
|
Other, net
|
|
|
(52 |
) |
|
|
(43 |
) |
|
|
(55 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Other income (expense), net
|
|
$ |
(8 |
) |
|
$ |
6 |
|
|
$ |
9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| 16. |
STOCK INCENTIVE PLANS |
Delphi has several plans under which it issues stock options and
restricted stock units. While we have historically granted
options to a broad group of employees, growing employee concern
with regard to the incentive value of options that are
significantly out-of-the-money and stockholder concern over
potential dilution have caused us to modify our compensation
philosophy going forward 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
95
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 stock appreciation
right (“SAR”) having an equivalent strike price, term
and conditions to exercise as the surrendered option. The offer
to exchange outstanding eligible options for cash-settled stock
appreciation rights on a one-for-one basis enabled eligible
employees to better align their outstanding incentive awards
with our new compensation philosophy while at the same time
preserving the value to the eligible employee of previously
granted awards. The exchange did not result in the recognition
of expense in 2003 because the fair market value of our stock
was below the stock appreciation right exercise price. 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. The table
below indicates as a separate line item those stock options,
which were exchanged as a result of the tender offer. As of
December 31, 2004, there were approximately 25 million
shares available for future grants. Options generally vest over
two to three years and expire ten years from the grant date.
Stock options granted during 2004, 2003 and 2002 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 | |
|
Exercise Price | |
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
|
|
Outstanding as of January 1, 2002
|
|
|
74,089 |
|
|
$ |
15.42 |
|
|
Granted
|
|
|
12,373 |
|
|
$ |
13.66 |
|
|
Exercised
|
|
|
(1,002 |
) |
|
$ |
11.82 |
|
|
Forfeited
|
|
|
(961 |
) |
|
$ |
16.74 |
|
| |
|
|
|
|
|
|
|
Outstanding as of December 31, 2002
|
|
|
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 |
|
| |
|
|
|
|
|
|
|
Options exercisable December 31, 2002
|
|
|
53,548 |
|
|
$ |
16.16 |
|
|
Options exercisable December 31, 2003
|
|
|
62,721 |
|
|
$ |
15.18 |
|
|
Options exercisable December 31, 2004
|
|
|
71,914 |
|
|
$ |
14.60 |
|
96
The following is a summary of the range of exercise prices for
stock options that are outstanding and exercisable at
December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Approved by Stockholders | |
| | |
| |
|
Weighted | |
|
Weighted | |
|
Number of | |
|
|
| Range of |
|
Outstanding | |
|
Average | |
|
Average | |
|
Stock Options | |
|
Weighted Average | |
| Exercise Prices |
|
Stock Options | |
|
Remaining Life | |
|
Exercise Price | |
|
Exercisable | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
|
|
|
|
(in thousands) | |
|
|
|
$ 8.43 - $10.00
|
|
|
12,024 |
|
|
|
8.0 |
|
|
$ |
8.47 |
|
|
|
4,265 |
|
|
$ |
8.53 |
|
|
$10.01 - $20.00
|
|
|
53,196 |
|
|
|
5.8 |
|
|
$ |
13.53 |
|
|
|
42,502 |
|
|
$ |
14.09 |
|
|
$20.01 - $20.97
|
|
|
79 |
|
|
|
4.0 |
|
|
$ |
20.66 |
|
|
|
79 |
|
|
$ |
20.66 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
65,299 |
|
|
|
|
|
|
$ |
12.61 |
|
|
|
46,846 |
|
|
$ |
13.60 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other Plans | |
| | |
| |
|
Weighted | |
|
Weighted | |
|
Number of | |
|
|
| Range of |
|
Outstanding | |
|
Average | |
|
Average | |
|
Stock Options | |
|
Weighted Average | |
| Exercise Prices |
|
Stock Options | |
|
Remaining Life | |
|
Exercise Price | |
|
Exercisable | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
|
|
|
|
(in thousands) | |
|
|
|
$ 9.55-$10.00
|
|
|
1 |
|
|
|
3.0 |
|
|
$ |
9.55 |
|
|
|
1 |
|
|
$ |
9.55 |
|
|
$10.01-$20.00
|
|
|
22,113 |
|
|
|
4.6 |
|
|
$ |
15.90 |
|
|
|
22,113 |
|
|
$ |
15.90 |
|
|
$20.01-$24.76
|
|
|
2,954 |
|
|
|
4.0 |
|
|
$ |
20.64 |
|
|
|
2,954 |
|
|
$ |
20.64 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
25,068 |
|
|
|
|
|
|
$ |
16.46 |
|
|
|
25,068 |
|
|
$ |
16.46 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2004, 2003, 2002 and 1999, Delphi awarded approximately
4.5 million, 3 million, 1 million and
3 million restricted stock units to employees at a weighted
average fair market value of $10, $8, $14 and $17, respectively.
Compensation expense related to restricted stock unit awards is
being recognized over graded vesting periods of 1 to
15 years.
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
intersegment 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. Management’s review of our
sector operating results for 2004, 2003 and 2002 for purposes of
making operating decisions and assessing performance excludes
certain charges in 2004 of $123 million in cost of sales,
$372 million in depreciation and amortization and
$192 million in employee and product line charges (the
“2004 Charges”), certain charges in 2003 of
$107 million in cost of sales, $58 million in
depreciation and amortization and $396 million in employee
and product line charges (the “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 amounts. Included
below are sales and operating data for our sectors for years
ended December 31, 2004, 2003, and 2002, which were
realigned in 2004. The 2003 and 2002 data has been reclassified
to conform with the current sector alignment. Also, during the
fourth quarter of 2003, we changed our method of costing our
inventories in the U.S. from the last-in, first-out
(“LIFO”) method
97
to the first-in, first-out (“FIFO”) method. In
accordance with accounting principles generally accepted in the
United States of America, all prior periods have been adjusted
to give retroactive effect to this change.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dynamics, | |
|
|
|
|
|
|
|
|
| |
|
Propulsion, | |
|
Electrical, | |
|
Automotive | |
|
|
|
|
| |
|
Thermal & | |
|
Electronics | |
|
Holdings | |
|
|
|
|
| 2004: |
|
Interior | |
|
& Safety | |
|
Group | |
|
Other(a) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Net sales to GM and affiliates
|
|
$ |
7,919 |
|
|
$ |
6,032 |
|
|
$ |
1,466 |
|
|
$ |
— |
|
|
$ |
15,417 |
|
|
Net sales to other customers
|
|
|
5,338 |
|
|
|
7,473 |
|
|
|
389 |
|
|
|
5 |
|
|
|
13,205 |
|
|
Inter-sector net sales
|
|
|
863 |
|
|
|
378 |
|
|
|
712 |
|
|
|
(1,953 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total net sales
|
|
$ |
14,120 |
|
|
$ |
13,883 |
|
|
$ |
2,567 |
|
|
$ |
(1,948 |
) |
|
$ |
28,622 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$ |
572 |
(b) |
|
$ |
441 |
(b) |
|
$ |
86 |
(b) |
|
$ |
45 |
|
|
$ |
1,144 |
(b) |
|
Sector operating (loss) income
|
|
$ |
(65 |
)(c) |
|
$ |
955 |
(c) |
|
$ |
(590 |
)(c) |
|
$ |
(95 |
)(c) |
|
$ |
205 |
(c) |
|
Equity income
|
|
$ |
64 |
|
|
$ |
21 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
86 |
|
|
Investment in affiliates
|
|
$ |
285 |
|
|
$ |
195 |
|
|
$ |
— |
|
|
$ |
16 |
|
|
$ |
496 |
|
|
Goodwill
|
|
$ |
421 |
|
|
$ |
341 |
|
|
$ |
— |
|
|
$ |
36 |
|
|
$ |
798 |
|
|
Sector assets
|
|
$ |
8,815 |
|
|
$ |
8,306 |
|
|
$ |
759 |
|
|
$ |
(1,287 |
) |
|
$ |
16,593 |
|
|
Capital expenditures
|
|
$ |
440 |
|
|
$ |
386 |
|
|
$ |
55 |
|
|
$ |
33 |
|
|
$ |
914 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dynamics, | |
|
|
|
|
|
|
|
|
| |
|
Propulsion, | |
|
Electrical, | |
|
Automotive | |
|
|
|
|
| |
|
Thermal & | |
|
Electronics | |
|
Holdings | |
|
|
|
|
| 2003: |
|
Interior | |
|
& Safety | |
|
Group | |
|
Other(a) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Net sales to GM and affiliates
|
|
$ |
8,656 |
|
|
$ |
6,554 |
|
|
$ |
1,819 |
|
|
$ |
— |
|
|
$ |
17,029 |
|
|
Net sales to other customers
|
|
|
4,702 |
|
|
|
5,959 |
|
|
|
386 |
|
|
|
1 |
|
|
|
11,048 |
|
|
Inter-sector net sales
|
|
|
817 |
|
|
|
412 |
|
|
|
789 |
|
|
|
(2,018 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total net sales
|
|
$ |
14,175 |
|
|
$ |
12,925 |
|
|
$ |
2,994 |
|
|
$ |
(2,017 |
) |
|
$ |
28,077 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$ |
528 |
(d) |
|
$ |
417 |
(d) |
|
$ |
76 |
(d) |
|
$ |
41 |
|
|
$ |
1,062 |
(d) |
|
Sector operating income (loss)
|
|
$ |
398 |
(e) |
|
$ |
974 |
(e) |
|
$ |
(591 |
)(e) |
|
$ |
(131 |
)(e) |
|
$ |
650 |
(e) |
|
Equity income (loss)
|
|
$ |
62 |
|
|
$ |
21 |
|
|
$ |
— |
|
|
$ |
(1 |
) |
|
$ |
82 |
|
|
Investment in affiliates
|
|
$ |
243 |
|
|
$ |
172 |
|
|
$ |
— |
|
|
$ |
16 |
|
|
$ |
431 |
|
|
Goodwill
|
|
$ |
463 |
|
|
$ |
301 |
|
|
$ |
— |
|
|
$ |
9 |
|
|
$ |
773 |
|
|
Sector assets
|
|
$ |
10,503 |
|
|
$ |
8,716 |
|
|
$ |
2,282 |
|
|
$ |
(435 |
) |
|
$ |
21,066 |
|
|
Capital expenditures
|
|
$ |
553 |
|
|
$ |
393 |
|
|
$ |
85 |
|
|
$ |
15 |
|
|
$ |
1,046 |
|
98
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dynamics, | |
|
|
|
|
|
|
|
|
| |
|
Propulsion, | |
|
Electrical, | |
|
Automotive | |
|
|
|
|
| |
|
Thermal & | |
|
Electronics | |
|
Holdings | |
|
|
|
|
| 2002: |
|
Interior | |
|
& Safety | |
|
Group | |
|
Other(a) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Net sales to GM and affiliates
|
|
$ |
9,061 |
|
|
$ |
6,941 |
|
|
$ |
2,092 |
|
|
$ |
— |
|
|
$ |
18,094 |
|
|
Net sales to other customers
|
|
|
4,271 |
|
|
|
4,855 |
|
|
|
423 |
|
|
|
(2 |
) |
|
|
9,547 |
|
|
Inter-sector net sales
|
|
|
867 |
|
|
|
241 |
|
|
|
1,035 |
|
|
|
(2,143 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total net sales
|
|
$ |
14,199 |
|
|
$ |
12,037 |
|
|
$ |
3,550 |
|
|
$ |
(2,145 |
) |
|
$ |
27,641 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$ |
478 |
|
|
$ |
414 |
|
|
$ |
87 |
|
|
$ |
23 |
|
|
$ |
1,002 |
|
|
Sector operating income (loss)
|
|
$ |
433 |
(f) |
|
$ |
920 |
(f) |
|
$ |
(378 |
)(f) |
|
$ |
(75 |
)(f) |
|
$ |
900 |
(f) |
|
Equity income (loss)
|
|
$ |
48 |
|
|
$ |
21 |
|
|
$ |
— |
|
|
$ |
(24 |
) |
|
$ |
45 |
|
|
Investment in affiliates
|
|
$ |
199 |
|
|
$ |
171 |
|
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
373 |
|
|
Goodwill
|
|
$ |
413 |
|
|
$ |
278 |
|
|
$ |
— |
|
|
$ |
8 |
|
|
$ |
699 |
|
|
Sector assets
|
|
$ |
9,530 |
|
|
$ |
7,448 |
|
|
$ |
2,584 |
|
|
$ |
130 |
|
|
$ |
19,692 |
|
|
Capital expenditures
|
|
$ |
493 |
|
|
$ |
469 |
|
|
$ |
113 |
|
|
$ |
12 |
|
|
$ |
1,087 |
|
|
|
|
|
(a) |
|
Other includes activity not allocated to the product sectors and
elimination of inter-sector transactions. |
| |
|
(b) |
|
Excludes asset impairment charges recorded in 2004 of
$372 million with $109 million for Dynamics,
Propulsion, Thermal & Interior, $13 million for
Electrical, Electronics & Safety, and $250 million
for Automotive Holdings Group. |
| |
|
(c) |
|
Excludes the 2004 Charges of $194 million for Dynamics,
Propulsion, Thermal & Interior, $91 million for
Electrical, Electronics & Safety, $395 million for
Automotive Holdings Group and $7 million for Other. |
| |
|
(d) |
|
Excludes 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. |
| |
|
(e) |
|
Excludes the 2003 Charges of $86 million for Dynamics,
Propulsion, Thermal & Interior, $114 million for
Electrical, Electronics & Safety, $319 million for
Automotive Holdings Group and $42 million for Other. |
| |
|
(f) |
|
Excludes the 2002 Charges of $97 million for Dynamics,
Propulsion, Thermal & Interior, $45 million for
Electrical, Electronics & Safety, $104 million for
Automotive Holdings Group and $16 million for Other. |
A reconciliation between sector operating income and income
(loss) before income taxes for each of the years presented is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Sector operating income(a)
|
|
$ |
205 |
|
|
$ |
650 |
|
|
$ |
900 |
|
|
Interest expense
|
|
|
(232 |
) |
|
|
(211 |
) |
|
|
(210 |
) |
|
Other income (expense), net
|
|
|
(8 |
) |
|
|
6 |
|
|
|
9 |
|
| |
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes, minority interest, equity
income and Charges(a)
|
|
$ |
(35 |
) |
|
$ |
445 |
|
|
$ |
699 |
|
|
Charges
|
|
|
(687 |
) |
|
|
(561 |
) |
|
|
(262 |
) |
| |
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes, minority interest, and equity
income
|
|
$ |
(722 |
) |
|
$ |
(116 |
) |
|
$ |
437 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes the 2004, 2003, and 2002 Charges described above. |
99
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, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
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
|
|
$ |
13,724 |
|
|
$ |
5,909 |
|
|
$ |
19,633 |
|
|
$ |
3,439 |
|
|
$ |
15,481 |
|
|
$ |
4,957 |
|
|
$ |
20,438 |
|
|
$ |
4,071 |
|
|
$ |
16,761 |
|
|
$ |
4,712 |
|
|
$ |
21,473 |
|
|
$ |
4,138 |
|
|
Europe, Middle East, & Africa
|
|
|
1,286 |
|
|
|
6,020 |
|
|
|
7,306 |
|
|
|
1,998 |
|
|
|
1,222 |
|
|
|
4,960 |
|
|
|
6,182 |
|
|
|
1,906 |
|
|
|
1,056 |
|
|
|
3,992 |
|
|
|
5,048 |
|
|
|
1,661 |
|
|
Asia Pacific
|
|
|
97 |
|
|
|
1,001 |
|
|
|
1,098 |
|
|
|
376 |
|
|
|
101 |
|
|
|
944 |
|
|
|
1,045 |
|
|
|
301 |
|
|
|
81 |
|
|
|
691 |
|
|
|
772 |
|
|
|
288 |
|
|
South America
|
|
|
310 |
|
|
|
275 |
|
|
|
585 |
|
|
|
133 |
|
|
|
225 |
|
|
|
187 |
|
|
|
412 |
|
|
|
121 |
|
|
|
196 |
|
|
|
152 |
|
|
|
348 |
|
|
|
92 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
15,417 |
|
|
$ |
13,205 |
|
|
$ |
28,622 |
|
|
$ |
5,946 |
|
|
$ |
17,029 |
|
|
$ |
11,048 |
|
|
$ |
28,077 |
|
|
$ |
6,399 |
|
|
$ |
18,094 |
|
|
$ |
9,547 |
|
|
$ |
27,641 |
|
|
$ |
6,179 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 10, 2004, we announced that we are moving 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 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. These moves are effective
January 1, 2005. Delphi continues to study other sites for
inclusion in AHG.
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. We will report
our segment information based on the realigned sectors starting
in the first quarter of 2005.
|
|
| 18. |
FAIR VALUE OF FINANCIAL INSTRUMENTS, DERIVATIVES AND HEDGING
ACTIVITIES |
Delphi’s financial instruments include long-term debt. The
fair value of long-term debt 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, 2004 and 2003, the total of long-term
debt and junior subordinated notes due to Trust I and
Trust II was recorded at $2.5 billion and
$2.6 billion, respectively, and had estimated fair values
of $2.5 billion and $2.7 billion for the years ended
December 31, 2004 and 2003, respectively. For all other
financial instruments recorded at December 31, 2004 and
2003, 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
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, 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.
100
Delphi has foreign currency exchange exposure from buying and
selling in currencies other than the local currencies of our
operating units. The primary purpose of our 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, Singapore dollar, Canadian
dollar, Japanese yen, and Euro. We primarily utilize 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 our
commodity price hedging activities is to manage the volatility
associated with these forecasted inventory purchases. We
primarily utilize 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 our
debt portfolio, we periodically enter into derivative
transactions to manage our exposure to changes in interest
rates, although we do not have any outstanding at
December 31, 2004 and 2003.
The fair value of derivative financial instruments as of
December 31, 2004, 2003 and 2002 included current and
non-current assets of $99 million, $58 million, and
$11 million, respectively and current and non-current
liabilities of $43 million, $55 million, and
$63 million, respectively. 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 December 31,
2004, were $73 million after-tax ($91 million
pre-tax). Of this pre-tax total, a gain of approximately
$80 million is expected to be included in cost of sales
within the next 12 months and a gain of approximately
$6 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
$7 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 hedge
derivative contracts at each reporting period. Net gains of
$35 million after-tax ($52 million pre-tax) and net
losses of $11 million after-tax ($16 million pre-tax)
were included in OCI as of December 31, 2003 and 2002,
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 2004 and 2003, and $6 million in 2002.
Several events have occurred subsequent to December 31,
2004 that, although they do not impact the reported balances or
results of operations as of that date, are material to the
Company’s ongoing operations. Those items include: the
completion of our refinancing plan in June 2005 as described
more fully in Note 10 Debt; amendments to the
U.S. Asset Securitization program completed in March 2005
and June 2005 as described more fully in Note 5 Asset
Securitizations; shareholder and derivative lawsuits initiated
in early 2005 as described more fully in Note 13
Commitments and Contingencies; changes to U.S. salaried
employees health care benefits implemented in March 2005 as
described more fully in Note 12 Pension and Other
Postretirement Benefits; and purchases of certain previously
leased facilities in June 2005 as described more fully in
Note 13 Commitments and Contingencies. In addition, the
Company contributed $0.6 billion to its defined benefit
pension plan in the second quarter of 2005. Finally, the Company
has signed a non-binding letter of intent to sell its global
lead-acid battery business, comprised of assets totaling
approximately $175 million.
101
|
|
| 20. |
QUARTERLY DATA (UNAUDITED) |
The following quarterly financial information for the quarters
ended March 31, June 30, and September 30, 2004
and for each of the quarters in the year ended December 31,
2003 has been restated from amounts originally reported to give
effect to the restatement of Delphi’s financial statements
as discussed elsewhere in this Annual Report. Contemporaneously
with the filing of this Annual Report, Delphi has filed amended
Quarterly Reports on Form 10-Q/ A for the quarters ended
March 31, 2004 and June 30, 2004 that include restated
financial statements for those periods. Delphi has also filed
its Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 that includes financial statements that
differ from those included in Delphi’s Current Report on
Form 8-K dated October 18, 2004. Please refer to the
above noted quarterly reports for further information as to the
effects of the restatement on Delphi’s originally reported
interim financial information for 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
|
|
| |
|
| |
|
|
| |
|
March 31, | |
|
June 30, | |
|
Sept. 30, | |
|
Dec. 31, | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions, except per share amounts) | |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
7,405 |
|
|
$ |
7,542 |
|
|
$ |
6,642 |
|
|
$ |
7,033 |
|
|
$ |
28,622 |
|
|
Cost of sales
|
|
|
6,564 |
|
|
|
6,607 |
|
|
|
6,065 |
|
|
|
6,561 |
|
|
|
25,797 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
841 |
|
|
$ |
935 |
|
|
$ |
577 |
|
|
$ |
472 |
|
|
$ |
2,825 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
63 |
|
|
$ |
143 |
|
|
$ |
(119 |
) |
|
$ |
(4,840 |
) |
|
$ |
(4,753 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
$ |
0.11 |
|
|
$ |
0.25 |
|
|
$ |
(0.21 |
) |
|
$ |
(8.63 |
) |
|
$ |
(8.47 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.28 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
7,177 |
|
|
$ |
7,091 |
|
|
$ |
6,558 |
|
|
$ |
7,251 |
|
|
$ |
28,077 |
|
|
Cost of sales
|
|
|
6,321 |
|
|
|
6,209 |
|
|
|
5,956 |
|
|
|
6,390 |
|
|
|
24,876 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
856 |
|
|
$ |
882 |
|
|
$ |
602 |
|
|
$ |
861 |
|
|
$ |
3,201 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
124 |
|
|
$ |
106 |
|
|
$ |
(303 |
) |
|
$ |
63 |
|
|
$ |
(10 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
$ |
0.22 |
|
|
$ |
0.19 |
|
|
$ |
(0.54 |
) |
|
$ |
0.11 |
|
|
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.28 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
High
|
|
$ |
9.40 |
|
|
$ |
9.92 |
|
|
$ |
9.76 |
|
|
$ |
10.30 |
|
|
$ |
10.30 |
|
| |
Low
|
|
$ |
6.39 |
|
|
$ |
6.70 |
|
|
$ |
7.85 |
|
|
$ |
8.10 |
|
|
$ |
6.39 |
|
102
DELPHI CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Additions | |
|
|
|
|
| |
|
|
|
| |
|
|
|
|
| |
|
Balance at | |
|
Charged to Costs | |
|
Charged to Other | |
|
|
|
Balance at End | |
| Description |
|
Beginning of Period | |
|
and Expenses | |
|
Accounts | |
|
Deductions | |
|
of Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
92 |
|
|
$ |
57 |
|
|
$ |
(3 |
) |
|
$ |
(55 |
) |
|
$ |
91 |
|
|
December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
83 |
|
|
$ |
52 |
|
|
$ |
10 |
|
|
$ |
(53 |
) |
|
$ |
92 |
|
|
December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
87 |
|
|
$ |
57 |
|
|
$ |
15 |
|
|
$ |
(76 |
) |
|
$ |
83 |
|
103
|
|
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
None
|
|
| 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 Acting 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, 2004. 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)) and 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, and that receipts and
expenditures of 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, 2004, the end of our fiscal
year. Management based its assessment on criteria set forth in
the framework in Internal Control-Integrated Framework
issued by the Committee 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.
Management’s assessment concluded that the Company did not
maintain effective internal control over financial reporting as
of December 31, 2004 as a result of the following
identified 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 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 treatment for contracts; and |
| |
| |
• |
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. |
These control deficiencies contributed to the need to restate
the Company’s financial statements. As further described in
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of
104
Operations — Restatement and Conclusion of Audit
Committee Internal Investigation, the impact of the restatement
on the financial statements as of December 31, 2004 was to
reduce the originally reported beginning retained earnings
balance by $243 million, in addition to other adjustments
identified and recorded during the course of preparing financial
statements. Accordingly, management determined that these
control deficiencies represent material weaknesses. Because of
the existence of these material weaknesses, management has
concluded that the Company did not maintain effective internal
control over financial reporting as of December 31, 2004,
based on the criteria in the “Internal
Control — Integrated Framework”.
Management has discussed the material weaknesses described above
and related corrective actions with the Audit Committee and our
independent registered public accounting firm. Our independent
registered public accounting firm, Deloitte & Touche
LLP, has audited management’s assessment of our internal
control over financial reporting. Deloitte & Touche LLP
has issued an attestation report, which is included under
Item 8. Financial Statements and Supplementary
Data — Report of Independent Registered Public
Accounting Firm.
Changes in Internal Control Over Financial Reporting
As discussed above, we have identified material weaknesses in
our internal control over financial reporting. Although we have
not fully remediated the material weaknesses as of
December 31, 2004, we have made and will continue to make,
improvements to our policies and procedures as well as to the
staffing of positions which play a significant role in internal
control to address these material weaknesses. The following
provides further details regarding each material weakness
identified above and the remedial actions taken and planned as
of the date of this report.
|
|
|
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 |
The Company’s controls over the selection and application
of GAAP are ineffective as a result of insufficient resources
and technical accounting expertise within the organization to
resolve accounting matters in a timely manner. Furthermore,
accounting for transactions is performed across multiple
business units and functions that are not adequately staffed or
are staffed with individuals that do not have the appropriate
level of GAAP knowledge. Due to the pervasiveness of this
material weakness, many of the restatement items (as discussed
in Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Restatement and Conclusion of Audit Committee Internal
Investigation) resulted from the inappropriate selection of,
misapplication, or inadequate consideration of GAAP by Delphi
accounting personnel. Additional personnel and oversight is
needed at the Company’s headquarters to review the
accounting for transactions to ensure compliance with GAAP.
Management is increasing the number of qualified accountants on
the global accounting staff by actively recruiting additional
certified public accountants to increase the knowledge of
accounting and strengthen internal controls within the Company.
Management has committed to providing the finance staff with
additional support and training in order to enable them to
identify unusual or complex transactions requiring further
consideration by technical accounting experts or others within
the organization. To address this material weakness until such
time as management can recruit and train additional staff
members, management has determined the following additional
procedures will be performed:
|
|
|
| |
• |
More transactions will be reviewed by the chief accounting
officer rather than at the business unit or function,
particularly those which deviate from previously reviewed or
standard terms and conditions; |
| |
| |
• |
Management will strengthen its review of the documentation
supporting the accounting for transactions; and |
105
|
|
|
| |
• |
External experts will be utilized, when deemed necessary, to
assist in evaluating transactions as well as preparing and
reviewing the appropriate supporting documentation. |
|
|
|
Ineffective or inadequate accounting policies to ensure
the proper and consistent application of GAAP throughout the
organization |
The Company’s accounting policies were inadequate or
insufficiently comprehensive to ensure proper and consistent
application throughout the organization. This resulted in
adjustments, which were material to the consolidated financial
statements as of December 31, 2004. Such adjustments
included inappropriate timing of income related to credits,
rebates, or other lump-sum payments from suppliers, under and
over-recorded liabilities related to various services provided
to the Company, inappropriate adjustment (or lack of adjustment)
to significant estimates within the financial statements, and
misclassification of amounts within financial statement
captions. A contributing factor was the lack of sufficient
detail or clarity of existing policies to enable their proper
application.
In the fourth quarter of 2004, management adopted and
distributed new policies to be applied in accounting for vendor
rebates, credits and other lump-sum payments. Management has
also revised its policies and procedures related to period-end
accruals. Management conducted training sessions with the
finance staff of each division to review these policies and to
increase sensitivity and focus on the issues covered by the new
policies and continues to monitor their implementation. Delphi
has also initiated a project to review and update other
accounting policies, establish written policies for areas where
such polices do not exist and has engaged third party experts in
accounting to assist in this effort. Management will continue to
conduct training sessions throughout the organization to explain
each of its policies and procedures adopted and require that
accounting conclusions, assumptions and estimates are documented
and supported by such accounting polices or relevant accounting
literature in accordance with GAAP. Management will assess the
effectiveness of the Company’s adherence to the accounting
polices through ongoing monitoring activities.
|
|
|
Ineffective or inadequate controls over the administration
and related accounting for contracts |
The Company does not have effective controls related to the
administration and accounting for contracts. In particular, the
Company does not have adequate controls to identify and analyze
the terms and conditions, both written and unwritten, of new
contracts, or procedures to identify, analyze, and properly
record the impact of amendments, supplement letters, or other
agreements related to existing contracts. As a result,
transactions related to supplier and royalty agreements were not
accounted for in accordance with GAAP, resulting in material
adjustments to the consolidated financial statements as of
December 31, 2004.
Management is in the process of adopting formal contract
administration procedures and will require consistent
application throughout the organization. Management intends to
document its contract administration procedures and periodically
evaluate and test such procedures to prevent recurrences of the
issues identified above. Although some areas in the organization
have revised their contract administration procedures, best
practices will be adopted throughout the organization. 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. Management is currently in the
process of formalizing a broader contract administration review
process that would extend beyond the information technology
area. In addition, management has conducted and will continue to
provide training throughout the organization to communicate the
importance of documenting the economic substance and course of
dealings related to the transaction, including any related
amendments or correspondence between the parties, to facilitate
the appropriate accounting for the transaction.
106
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|
|
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 |
The principal instances of management override that evidenced a
material weakness occurred prior to 2002 and notably, before the
Company began the implementation and documentation of more
stringent disclosure controls and procedures and the detailed
assessment of its internal controls over financial reporting as
required by the Sarbanes-Oxley Act. Since such period, the
Company’s controls and procedures have strengthened.
Despite such strengthening, which we believe will assist in
detecting and preventing future incidents of this nature, we
believe further action is needed to foster a culture that
encourages those with concerns of management override to bring
those to the prompt attention of management, whether directly or
through the Company’s ethics line, so that those concerns
can be evaluated and appropriate action taken. The principal
remedial action taken to address this aspect is to ensure that
those at the top not only set the right tone but also understand
that they will be held personally accountable for the failure to
foster an environment that encourages those with concerns to
present them and to elevate and address those concerns
constructively within the organization. Management has already
begun putting together training programs and presentations to be
disseminated throughout the organization, starting with the top
executive officers, to instill lessons learned from the Audit
Committee’s investigation as well as management’s
assessment of internal controls, including clearly outlining the
review and consultation protocol for non-routine transactions.
Specific actions that have taken place since 2002 include:
|
|
|
| |
• |
Over the course of 2002, Delphi hired a new chief accounting
officer and controller, a new vice president of purchasing, a
full time in-house securities counsel and began transitioning to
a new chief information officer. We believe each of these
actions contributed to a strengthening of our internal controls.
The chief accounting officer and controller oversaw the
implementation of the Company’s disclosure controls and
procedures, including the formation of a disclosure committee.
These procedures have increased involvement of the
Company’s functional and divisional heads, including the
legal staff, in the financial reporting process, to assure that
our quarterly and annual SEC filings fairly present
Delphi’s financial position, results of operations and cash
flows. |
| |
| |
• |
In the third quarter of 2002, Delphi established a disclosure
committee to ensure that accounting policies are properly
applied, that financial information disclosed is complete,
informative and properly reflects the underlying substance of
transactions and events, and when necessary, additional
disclosure is presented to provide investors with a materially
accurate and complete picture of the Company’s financial
condition, results of operations and cash flows. |
| |
| |
• |
In March 2002, the effectiveness of the internal audit function
was enhanced by appointing an officer of the Company and member
of the Delphi Strategy Board to lead the internal audit staff.
In addition, the Audit Committee recently determined that the
vice president of Delphi’s corporate audit services shall
serve as the Company’s Chief Compliance Officer with a
dotted line reporting relationship directly to the Audit
Committee. On June 9, 2005, this officer was appointed vice
president and treasurer and a search for his replacement as vice
president of Delphi’s corporate audit services is ongoing. |
| |
| |
• |
In the second quarter of 2003, the Board of Directors designated
the Audit Committee as the Company’s Qualified Legal
Compliance Committee in order that the general counsel and other
legal staff members of the Company could expeditiously report
any concerns they had regarding compliance, including
management’s compliance with federal securities laws,
directly to the Audit Committee. |
| |
| |
• |
In the third quarter of 2004, management designed a new
quarterly control involving an independent review by the
internal audit staff of “top-side” corporate level
journal entries specifically aimed at detecting management
override. In addition, Delphi recently increased the |
107
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| |
|
emphasis placed on the importance of documenting accounting
decisions and review of journal entries by both the finance and
internal audit staff. |
Management recognizes that many of the remedial actions it has
taken or will take require continuous monitoring and evaluation
for effectiveness, which will depend on maintaining a strong
internal audit function. Until such time as the Company is able
to identify a suitable replacement to lead its internal audit
function, it will look to external experts to supplement its
existing staff. Finally, the Company’s disclosure and
financial reporting practices have responded to the increased
disclosure requirements of the SEC, particularly the revised
guidance regarding materiality and the focus on qualitative as
well as quantitative factors in making such determinations,
increased focus on disclosure of commitments and contingencies,
including off-balance sheet financings, and a more stringent
focus on the economic substance of transactions and
relationships between parties in making decisions regarding the
application of accounting policies and standards. This has been
an evolving and iterative process and will continue as the
Company evaluates its internal control over financial reporting
and its disclosure controls and procedures.
* * * *
Delphi recognizes that the tone at the top of the organization
is a key entity-level control in any organization, particularly
in terms of preventing or detecting management override.
Management has proactively communicated the importance of strong
entity-level controls, particularly those related to tone at the
top, to all levels of the organization and reinforced the
importance of integrating them into every aspect of the
Company’s operations, processes and culture.
Management and the Board of Directors will continuously consider
whether additional changes in reporting relationships and
responsibilities would strengthen the Company’s internal
controls. As part of its quarterly review and annual assessment
of internal controls over financial reporting and disclosure
controls and procedures, the Company will continue to strive to
strengthen and improve its controls.
Management will review progress on these activities on a
consistent and ongoing basis at the CEO level, across the senior
management team and in conjunction with our Board of Directors.
Management also plans on taking additional steps to elevate
company awareness and communications of these important issues
through formal channels such as company meetings, departmental
meetings and training.
108
PART III
|
|
| ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
DIRECTORS
The names, ages and other positions with Delphi, if any, as of
May 31, 2005 of each director are listed below.
| |
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| Name |
|
Age | |
|
Position | |
|
Term | |
| |
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| |
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| |
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| |
|
J.T. Battenberg III
|
|
|
62 |
|
|
|
Chairman; CEO |
|
|
|
since 1999 |
|
|
Robert H. Brust
|
|
|
61 |
|
|
|
Director |
|
|
|
since 2001 |
|
|
Virgis W. Colbert
|
|
|
65 |
|
|
|
Director |
|
|
|
since 1999 |
|
|
Oscar de Paula Bernardes Neto
|
|
|
58 |
|
|
|
Director |
|
|
|
since 1999 |
|
|
David N. Farr
|
|
|
50 |
|
|
|
Director |
|
|
|
since 2002 |
|
|
Dr. Bernd Gottschalk
|
|
|
61 |
|
|
|
Director |
|
|
|
since 2000 |
|
|
Shoichiro Irimajiri
|
|
|
65 |
|
|
|
Director |
|
|
|
since 1999 |
|
|
Craig G. Naylor
|
|
|
56 |
|
|
|
Director |
|
|
|
since 2005 |
|
|
Cynthia A. Niekamp
|
|
|
46 |
|
|
|
Director |
|
|
|
since 2003 |
|
|
Rodney O’Neal
|
|
|
51 |
|
|
|
President & COO |
|
|
|
since 2005 |
|
|
John D. Opie
|
|
|
67 |
|
|
|
Director |
|
|
|
since 1999 |
|
Mr. Battenberg has led Delphi and its predecessor,
the GM Automotive Components Group Worldwide (“ACG
Worldwide”) since 1992. Mr. Battenberg is on the Board
of Trustees of Kettering University, Columbia University
Business School and the National Advisory Board for
J.P. Morgan Chase & Co. He is also a member of the
Business Roundtable and Chairman of its Fiscal Policy Task
Force, the Business Council Executive Committee, the Group of
100, Economic Club of Detroit and FIRST (For Inspiration and
Recognition of Science and Technology).
Other Directorships: Sara Lee Corporation.
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.
Mr. Colbert was appointed Executive Vice President
for Miller Brewing Company in July 1997. 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.
Mr. Bernardes is the Senior Partner and Chairman of
LID Group. 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 a member of the Corporate
Governance and Public Issues Committee of Delphi’s Board of
Directors, and previously served as a member of the Audit
Committee of Delphi’s Board of Directors.
109
Other Directorships: Bunge Brasil S.A., Gerdau S.A.,
Johnson Electric Holdings Ltd., Companhia Suzano de Papel e
Celulose.
Mr. Farr was named CEO of Emerson in October 2000
and was 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 Webster University Board of Trustees and the Municipal
Theatre Association of St. Louis. 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 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 is a member of the Corporate
Governance and Public Issues Committee of Delphi’s Board of
Directors.
Other Directorships: Happinet Corporation, Asahi Tec
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 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.
Ms. Niekamp was named President & General
Manager, TorqTransfer Systems, Vice President, BorgWarner, Inc.
in July 2004. Ms. Niekamp previously served as Senior Vice
President and Chief Financial Officer of MeadWestvaco
Corporation. Prior to that position, Ms. Niekamp served as
Senior Vice President and was responsible for corporate strategy
as well as the company’s Specialty Chemical and Specialty
Paper businesses. She joined The Mead Corporation in 1995 as
Vice President, Corporate Strategy and Planning. In 1998, she
was named President of the Mead Specialty Paper division. Prior
to joining Mead, Ms. Niekamp held several positions with
TRW, including Managing Director of TRW Transportation Systems,
Director of Operations for TRW Technar Automotive Sensor
Operations and Vice President, Planning and Development for the
Engine and Aftermarket Group. Ms. Niekamp is a member of
the Audit Committee of Delphi’s Board of Directors.
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. He is a member of the Executive Leadership Council.
Other Directorships: Goodyear Tire & Rubber
Company.
110
Mr. Opie is the former Vice Chairman of the Board
and Executive Officer for General Electric Company. 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: Wal-Mart.
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 2004, the Audit Committee
was 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. The Board of Directors has determined that
Mr. Brust, presently the Chief Financial Officer and an
Executive Vice President of Eastman Kodak Company and previously
the Chief Financial Officer and a Senior Vice President of
Unisys Corporation, both publicly traded global manufacturing
companies; and Ms. Niekamp, President & General
Manager, TorqTransfer Systems, Vice President, BorgWarner, Inc.
and previously the Chief Financial Officer and a Senior Vice
President of MeadWestvaco, both publicly traded global
manufacturing companies, are each 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 and Bernardes
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). In February of 2005,
Mr. Bernardes was reassigned from the Audit Committee to
the Corporate Governance and Public Issues Committee, with the
result that the Audit Committee is presently composed of three
individuals.
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 2004.
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 this report 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.
111
|
|
| ITEM 11. |
EXECUTIVE COMPENSATION |
Summary Compensation Table
The table below shows compensation information for J. T.
Battenberg III, who served as our chief executive officer
in 2004, and our four next highest paid executive officers as of
the end of 2004. None of the executive officers named in the
Summary Compensation Table received an increase in base salary
during 2004. Mr. Battenberg’s 2004 salary, as reported
below, reflects the full year impact of the increase he received
in 2003.
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Long-Term Compensation | |
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Awards | |
|
Payouts | |
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Annual Compensation | |
|
| |
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| |
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| |
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| |
|
Restricted | |
|
Securities | |
|
Long-Term | |
|
|
| |
|
|
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|
Other Annual | |
|
Stock Unit | |
|
Underlying | |
|
Incentive | |
|
All Other | |
| Name and |
|
|
|
|
|
Compensation | |
|
Awards | |
|
Options | |
|
Payouts | |
|
Compensation | |
| Principal Position(1) |
|
Year | |
|
Salary ($) | |
|
Bonus ($) | |
|
($)(2) | |
|
($)(3) | |
|
(#) | |
|
($)(4) | |
|
($)(5) | |
| |
|
| |
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| |
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| |
|
| |
|
| |
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| |
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| |
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| |
|
J. T. Battenberg III
|
|
|
2004 |
|
|
|
1,700,000 |
|
|
|
0 |
|
|
|
115,887 |
|
|
|
1,889,271 |
|
|
|
838,000 |
|
|
|
0 |
|
|
|
51,466 |
|
| |
Chairman of the |
|
|
2003 |
|
|
|
1,675,000 |
|
|
|
0 |
|
|
|
107,477 |
|
|
|
1,213,920 |
|
|
|
960,000 |
|
|
|
732,000 |
|
|
|
52,213 |
|
| |
Board and Chief |
|
|
2002 |
|
|
|
1,600,000 |
|
|
|
2,100,000 |
|
|
|
93,682 |
|
|
|
2,100,000 |
|
|
|
605,882 |
|
|
|
945,000 |
|
|
|
16,458 |
|
| |
Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald L. Runkle
|
|
|
2004 |
|
|
|
1,000,000 |
|
|
|
0 |
|
|
|
n/a |
|
|
|
633,515 |
|
|
|
281,000 |
|
|
|
0 |
|
|
|
16,624 |
|
| |
|
|
|
2003 |
|
|
|
1,000,000 |
|
|
|
0 |
|
|
|
76,586 |
|
|
|
385,673 |
|
|
|
305,000 |
|
|
|
340,000 |
|
|
|
19,249 |
|
| |
|
|
|
2002 |
|
|
|
950,000 |
|
|
|
765,000 |
|
|
|
69,599 |
|
|
|
800,000 |
|
|
|
174,191 |
|
|
|
472,500 |
|
|
|
0 |
|
|
Alan S. Dawes
|
|
|
2004 |
|
|
|
960,000 |
|
|
|
0 |
|
|
|
n/a |
|
|
|
633,515 |
|
|
|
281,000 |
|
|
|
0 |
|
|
|
15,960 |
|
| |
|
|
|
2003 |
|
|
|
960,000 |
|
|
|
0 |
|
|
|
n/a |
|
|
|
385,673 |
|
|
|
305,000 |
|
|
|
320,000 |
|
|
|
18,480 |
|
| |
|
|
|
2002 |
|
|
|
850,000 |
|
|
|
800,000 |
|
|
|
n/a |
|
|
|
800,000 |
|
|
|
166,618 |
|
|
|
425,250 |
|
|
|
0 |
|
|
Rodney O’Neal
|
|
|
2004 |
|
|
|
860,000 |
|
|
|
0 |
|
|
|
n/a |
|
|
|
613,224 |
|
|
|
272,000 |
|
|
|
0 |
|
|
|
14,296 |
|
| |
Director, President |
|
|
2003 |
|
|
|
860,000 |
|
|
|
0 |
|
|
|
62,165 |
|
|
|
373,028 |
|
|
|
295,000 |
|
|
|
280,000 |
|
|
|
16,553 |
|
| |
and Chief Operating |
|
|
2002 |
|
|
|
725,000 |
|
|
|
760,000 |
|
|
|
53,596 |
|
|
|
775,000 |
|
|
|
151,471 |
|
|
|
378,000 |
|
|
|
0 |
|
| |
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David B. Wohleen
|
|
|
2004 |
|
|
|
825,000 |
|
|
|
0 |
|
|
|
n/a |
|
|
|
613,224 |
|
|
|
272,000 |
|
|
|
0 |
|
|
|
13,714 |
|
| |
Vice Chairman |
|
|
2003 |
|
|
|
825,000 |
|
|
|
0 |
|
|
|
n/a |
|
|
|
373,028 |
|
|
|
295,000 |
|
|
|
280,000 |
|
|
|
15,880 |
|
| |
|
|
|
2002 |
|
|
|
700,000 |
|
|
|
740,000 |
|
|
|
n/a |
|
|
|
750,000 |
|
|
|
151,471 |
|
|
|
378,000 |
|
|
|
0 |
|
Notes
|
|
| (1) |
The titles noted above are the officers’ current titles.
Prior to January 7, 2005 the titles were as follows: J. T.
Battenberg III, Chairman, Chief Executive Officer and
President; Donald L. Runkle, Vice Chairman —
Enterprise Technologies; Alan S. Dawes, Vice Chairman and Chief
Financial Officer; Rodney O’Neal, President, Dynamics,
Propulsion and Thermal sector; David B. Wohleen, President,
Electrical, Electronics, Safety & Interior sector. As
previously announced Mr. Runkle is retiring from the
Company effective July 1, 2005. Mr. Dawes resigned
from the Company effective March 4, 2005. |
| |
| (2) |
This amount includes benefits from the use of corporate
transportation in 2004, including compensation to the
individuals for personal use by the executive and the
executive’s family of company aircraft. The amount included
for personal use of the company aircraft represents the amount
imputed to them as compensation for federal income tax purposes
($61,079 for Mr. Battenberg and negligible amounts for each
of the other named executive officers). The executive security
program approved by our Board of Directors requires that
Mr. Battenberg, as Chairman use company aircraft for
personal as well as business travel. We believe this requirement
is for the company’s benefit rather than a personal benefit
or perquisite to the executives and therefore we have not
included the incremental cost of such transportation in the
above table. We allow the other named executive officers limited
personal use of the aircraft at a personal expense to them. The
incremental cost to the company of providing each the following
named executives with use of the aircraft for personal
transportation is J. T. Battenberg III $206,264; Donald L.
Runkle $52,880; Alan S. Dawes $74,071; Rodney O’Neal
$35,684; David B. Wohleen $7,975. |
112
|
|
| (3) |
Shows value of restricted stock units granted on May 7,
2004 as of the date of grant. The market value of the shares
represented by total restricted stock units held on and as of
December 31, 2004, is reflected in the 2004 column of the
table below. Additional restricted stock units vested, as
indicated below, on January 3, 2005 and have been included
in the “Shares Beneficially Owned” column of the Stock
Ownership of Management and More Than 5% Stockholders table in
this Form 10-K. Listed below are the total number of shares
represented by all restricted stock units, by year, allocated to
the named executive officers as of December 31, 2004,
including dividend equivalents, and the market values of such
shares (based on the closing price of our common stock on the
New York Stock Exchange as of December 31, 2004). |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 | |
|
Total RSU Grants | |
| |
|
| |
|
| |
|
| |
|
| |
| Named Executive |
|
Balance | |
|
Mkt. Value | |
|
Balance | |
|
Mkt. Value | |
|
Balance | |
|
Mkt. Value | |
|
Balance | |
|
Mkt. Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
J. T. Battenberg III
|
|
|
126,058 |
|
|
$ |
1,137,043 |
|
|
|
100,373 |
|
|
$ |
905,364 |
|
|
|
191,541 |
|
|
$ |
1,727,700 |
|
|
|
417,972 |
|
|
$ |
3,770,107 |
|
|
Donald L. Runkle
|
|
|
48,023 |
|
|
$ |
433,167 |
|
|
|
31,890 |
|
|
$ |
287,648 |
|
|
|
64,228 |
|
|
$ |
579,337 |
|
|
|
144,141 |
|
|
$ |
1,300,152 |
|
|
Alan S. Dawes
|
|
|
48,023 |
|
|
$ |
433,167 |
|
|
|
31,890 |
|
|
$ |
287,648 |
|
|
|
64,228 |
|
|
$ |
579,337 |
|
|
|
144,141 |
|
|
$ |
1,300,152 |
|
|
Rodney O’Neal
|
|
|
46,522 |
|
|
$ |
419,628 |
|
|
|
30,844 |
|
|
$ |
278,213 |
|
|
|
62,171 |
|
|
$ |
560,782 |
|
|
|
139,537 |
|
|
$ |
1,258,624 |
|
|
David B. Wohleen
|
|
|
45,021 |
|
|
$ |
406,089 |
|
|
|
30,844 |
|
|
$ |
278,213 |
|
|
|
62,171 |
|
|
$ |
560,782 |
|
|
|
138,036 |
|
|
$ |
1,245,085 |
|
|
|
| |
The vesting schedule for restricted stock units granted in 2002
is as follows: 25% on January 2, 2003, 25% on
January 3, 2005 and 50% on January 2, 2017 or at
retirement, whichever occurs earlier. The vesting schedule for
restricted stock units granted in 2003 is as follows: one-third
on April 26, 2004, one-third on April 24, 2006 and
one-third on April 24, 2008. The vesting schedule for
restricted stock units granted in 2004 is as follows: one-third
on May 7, 2007, one-third on May 7, 2008 and one-third
on May 7, 2009. |
|
|
| (4) |
Reflects long-term incentive payouts as follows: |
|
|
| |
Under the Delphi Corporation Performance Achievement Plan,
which was replaced by the Long-Term Incentive Plan in 2004.
Performance Periods 2000-2002, 2001-2003, and 2002-2004. For the
2001-2003 plan, in conjunction with the Compensation
Committee’s review of Delphi’s strategic business plan
and management’s performance over the preceding three
years, the Committee noted continued progress toward the
strategic goals, further customer diversification, strong
operating cash flow and the Company’s maintenance of an
investment grade credit rating, despite rising U.S. pension
and OPEB costs and lower customer vehicle production rates. The
Committee measured performance against one of the established
performance goals, return on net assets, recognizing the impact
of lower discount rates and asset returns on U.S. pension
and OPEB costs and approved a corresponding payout at the
threshold level. In 2004, also in conjunction with the
Board’s review of Delphi’s strategic business plan, we
modified, for all the outstanding Long-Term plans (2002-2004 and
2003-2005), the established goals for the 2003, 2004, and 2005
performance years to reflect a greater emphasis on meeting
certain threshold cash flow targets as part of the overall
performance and individual executive objectives. |
|
|
| (5) |
Includes matching contributions by Delphi under the
Savings-Stock Purchase Plan and the values of certain credits
provided to the named executive officers under the Benefit
Equalization Plan-Savings, which are shown together in the
“Savings Plans” column in the table below for 2004,
and 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,
which is shown in the “Imputed Income” column in the
table below for 2004. Under the Benefit Equalization Plan,
Delphi provides |
113
|
|
|
benefits substantially equal to benefits that could not be
provided under the Savings-Stock Purchase Plan because of
limitations under the Internal Revenue Code. |
| |
|
|
|
|
|
|
|
|
| Named Executive |
|
Savings Plans ($) | |
|
Imputed Income ($) | |
| |
|
| |
|
| |
|
J. T. Battenberg III
|
|
|
28,261 |
|
|
|
23,205 |
|
|
Donald L. Runkle
|
|
|
16,624 |
|
|
|
— |
|
|
Alan S. Dawes
|
|
|
15,960 |
|
|
|
— |
|
|
Rodney O’Neal
|
|
|
14,296 |
|
|
|
— |
|
|
David B. Wohleen
|
|
|
13,714 |
|
|
|
— |
|
|
|
| |
Upon the death of Mr. Battenberg, Delphi would be
reimbursed for its premiums paid on the Executive Split-Dollar
Endorsement Plan. |
Option Grants in Last Fiscal Year
The following table shows the stock options granted in 2004 to
the executive officers named in the Summary Compensation Table.
No stock appreciation rights have been granted to these officers.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
% of Total | |
|
|
|
|
|
|
| |
|
Number of | |
|
Options | |
|
|
|
|
|
|
| |
|
Securities | |
|
Granted to | |
|
|
|
|
|
|
| |
|
Underlying | |
|
Employees | |
|
Exercise | |
|
|
|
Grant Date | |
| |
|
Options | |
|
in Fiscal | |
|
Price | |
|
Expiration | |
|
Present | |
| Name |
|
Granted (#)(1) | |
|
Year | |
|
($/Sh.)(2) | |
|
Date(1) | |
|
Value ($)(3) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
J. T. Battenberg III
|
|
|
838,000 |
|
|
|
12.26 |
% |
|
$ |
10.02 |
|
|
|
April, 2014 |
|
|
$ |
2,530,760 |
|
|
Donald L. Runkle
|
|
|
281,000 |
|
|
|
4.11 |
% |
|
$ |
10.02 |
|
|
|
April, 2014 |
|
|
$ |
848,620 |
|
|
Alan S. Dawes
|
|
|
281,000 |
|
|
|
4.11 |
% |
|
$ |
10.02 |
|
|
|
April, 2014 |
|
|
$ |
848,620 |
|
|
Rodney O’Neal
|
|
|
272,000 |
|
|
|
3.98 |
% |
|
$ |
10.02 |
|
|
|
April, 2014 |
|
|
$ |
821,440 |
|
|
David B. Wohleen
|
|
|
272,000 |
|
|
|
3.98 |
% |
|
$ |
10.02 |
|
|
|
April, 2014 |
|
|
$ |
821,440 |
|
Notes
|
|
| (1) |
These options were granted on May 7, 2004 and include both
non-qualified and incentive stock options. One-third of each
option grant becomes exercisable on May 7 of each of 2005, 2006
and 2007. The incentive stock options expire ten years from the
date of grant and the non-qualified options expire two days
later. If a grantee retires, becomes disabled, or dies, his or
her pro-rated options continue to be exercisable up to the
earlier of the normal expiration date or five years in the case
of retirement and three years if the grantee becomes disabled or
dies. In most other instances of employment termination, all
rights end upon termination. Optionees are subject to certain
conditions, including refraining from competitive activity after
they retire from Delphi or otherwise cease employment with
Delphi under circumstances in which they retain their options.
Options generally cannot be transferred except through
inheritance. |
| |
| (2) |
The exercise price of the stock options is the average of the
high and low selling prices as reported in the Wall Street
Journal on the grant date. |
| |
| (3) |
These values were determined based on the Black-Scholes option
pricing model. Calculation of the Grant Date Present Value was
based on the following assumptions: Exercise of an option within
the first five years after its grant, price volatility of 37.4%,
a risk free rate of return of 4.1% and a dividend yield of 2.8%.
No adjustments were made for non-transferability. Our use of
this model does not necessarily mean that we believe that this
model accurately determines the value of options. The ultimate
value of the options in this table depends upon each
holder’s individual investment decisions and the actual
performance of Delphi’s common stock. |
114
Aggregated Option Exercises in Last Fiscal Year and Option
Values at Fiscal Year End
The following table shows information concerning the options
exercised in 2004 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 2004. No stock appreciation rights are
held by any named executive officer.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of Securities | |
|
Value of Unexercised | |
| |
|
|
|
|
|
Underlying Unexercised | |
|
In-the-Money Options | |
| |
|
Delphi Shares | |
|
|
|
Options at FY-End (#) | |
|
at FY-End ($)(1) | |
| |
|
Acquired on | |
|
Value | |
|
Exercisable/ | |
|
Exercisable/ | |
| Name |
|
Exercise (#) | |
|
Realized ($) | |
|
Unexercisable | |
|
Unexercisable | |
| |
|
| |
|
| |
|
| |
|
| |
|
J. T. Battenberg III
|
|
|
0 |
|
|
|
0 |
|
|
|
3,696,092/ 1,679,961 |
|
|
$ |
188,800/ $377,600 |
|
|
Donald L. Runkle
|
|
|
0 |
|
|
|
0 |
|
|
|
967,689/ 542,398 |
|
|
$ |
59,983/ $119,967 |
|
|
Alan S. Dawes
|
|
|
0 |
|
|
|
0 |
|
|
|
1,028,481/ 539,874 |
|
|
$ |
59,983/ $119,967 |
|
|
Rodney O’Neal
|
|
|
0 |
|
|
|
0 |
|
|
|
862,596/ 519,158 |
|
|
$ |
58,016/ $116,034 |
|
|
David B. Wohleen
|
|
|
0 |
|
|
|
0 |
|
|
|
849,049/ 519,158 |
|
|
$ |
58,016/ $116,034 |
|
Notes
|
|
| (1) |
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 New York Stock
Exchange on December 31, 2004) and the exercise prices of
the options. The closing price of Delphi’s common stock on
the New York Stock Exchange on December 31, 2004 was $9.02.
“In-the-money” means that the fair market value of the
underlying stock is greater than the option’s exercise
price on the valuation date. |
Long-Term Incentive Plan-Awards in Last Fiscal Year
The following table shows information on 2004 grants of
incentive awards to the executive officers named in the Summary
Compensation Table.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Performance or | |
|
|
| |
|
|
|
Other Period | |
|
Estimated Future Payouts Under | |
| |
|
Number of | |
|
Until | |
|
Non-Stock-Price-Based Plans(2) | |
| |
|
Shares, Units or | |
|
Maturation or | |
|
| |
| Name |
|
Other Rights(1) | |
|
Payout | |
|
Threshold ($) | |
|
Target ($) | |
|
Maximum ($) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
J. T. Battenberg III
|
|
$ |
2,514,000 |
|
|
|
2004-2006 |
|
|
$ |
1,005,600 |
|
|
$ |
2,514,000 |
|
|
$ |
5,028,000 |
|
|
Donald L. Runkle
|
|
$ |
843,000 |
|
|
|
2004-2006 |
|
|
$ |
337,200 |
|
|
$ |
843,000 |
|
|
$ |
1,686,000 |
|
|
Alan S. Dawes
|
|
$ |
843,000 |
|
|
|
2004-2006 |
|
|
$ |
337,200 |
|
|
$ |
843,000 |
|
|
$ |
1,686,000 |
|
|
Rodney O’Neal
|
|
$ |
816,000 |
|
|
|
2004-2006 |
|
|
$ |
326,400 |
|
|
$ |
816,000 |
|
|
$ |
1,632,000 |
|
|
David B. Wohleen
|
|
$ |
816,000 |
|
|
|
2004-2006 |
|
|
$ |
326,400 |
|
|
$ |
816,000 |
|
|
$ |
1,632,000 |
|
Notes
|
|
| (1) |
Incentive awards under the Delphi Corporation Long-Term
Incentive — Cash Award Plan are denominated in dollars. |
| |
| (2) |
Relates to payment of incentive awards under the Delphi
Corporation Long-Term Incentive Plan for performance during 2004
through 2006. If the threshold performance level is met or
exceeded, the percentage of the incentive award that may be paid
to participants will depend on the extent to which the
established performance target for the three-year performance
period is achieved, but will not exceed the maximum level. If
the threshold performance level is not met, no awards will be
paid. |
Under the Delphi Corporation Long-Term Incentive Award, eligible
employees may receive long-term incentive awards which are based
on performance during a period that may be at least two years
and not more than five years. The final amount of the award
depends on whether the performance goals are achieved as well as
on the employee’s individual performance.
115
Delphi’s Compensation and Executive Development Committee
decides the dollar amount of a final award by determining how
completely certain performance goals were achieved. Typically,
these awards are granted each year, but they are not paid unless
the performance goals are achieved over the three-year
performance period. Performance goals for these awards reported
in the table cover the 2004-2006 period and include the same
performance measures for each of the named executive officers.
The performance goals and the mechanics of receiving a final
award are more fully discussed under “Compensation and
Executive Development Committee Report on Executive
Compensation — Long-Term Incentives” appearing
earlier in this section.
Final awards made to the named executive officers under the
Delphi Corporation Performance Achievement Plan (which expired
in 2004 and was replaced by the Long-Term Incentive Plan), for
the 2000-2002, 2001-2003, and 2002-2004 performance periods are
reported under the “Long-Term Incentive Payouts”
column in the Summary Compensation Table.
Generally, an employee’s outstanding incentive awards are
cancelled if the 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.
Retirement Programs
The retirement program for our executives in the United States
consists of two plans. One plan, the Delphi Retirement Program
for Salaried Employees, is a qualified plan for purposes of the
Internal Revenue Code. We also have a plan that is not
considered a qualified plan under the Internal Revenue Code, the
Supplemental Executive Retirement Program (“SERP”).
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 Supplemental Executive Retirement Program, an
executive’s service with General Motors Corporation prior
to January 1, 1999 is taken into account when determining
service with Delphi for 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 a
tax-qualified plan subject to the requirements of the Employee
Retirement Income Security Act of 1974, as amended
(“ERISA”) and the Internal Revenue Code of 1986, as
amended (“IRC”). 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 IRC. 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, or 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% of an eligible employee’s
base pay which is called the “pay credit”.
116
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 or as soon thereafter as administratively
feasible. This is referred to as the “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 eligible executive makes Part B contributions to the
Delphi Retirement Program for Salaried Employees, the executive
may also be eligible to receive a non-qualified Regular SERP
Benefit. The sum of the Delphi Salaried Retirement
Program’s benefits plus the Regular SERP Benefit will
provide an eligible executive with the following total annual
retirement benefits: 2% times years of Part B credited
service times the average of the highest five of the last ten
years average annual base salary, minus a portion (based on
years of credited service) of the maximum annual Social Security
benefit in the year of retirement payable to a person who is
eligible for an unreduced benefit.
The table below shows the estimated total annual Delphi
Retirement Program for Salaried Employees benefits (under
Part A and Part B) plus the Regular SERP Benefit
(assuming the executive qualifies). The chart gives an average
annual base salary as of December 31, 2004. Such amount
would be paid in 12 equal monthly installments per year to
executives retiring in 2004 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 Part B Credited Service | |
| |
|
| |
| Average Annual Base Salary(1) |
|
15 | |
|
25 | |
|
35 | |
|
45 | |
| |
|
| |
|
| |
|
| |
|
| |
|
$ 350,000
|
|
$ |
98,254 |
|
|
$ |
163,756 |
|
|
$ |
229,258 |
|
|
$ |
294,761 |
|
|
600,000
|
|
|
173,254 |
|
|
|
288,756 |
|
|
|
404,258 |
|
|
|
519,761 |
|
|
850,000
|
|
|
248,254 |
|
|
|
413,756 |
|
|
|
579,258 |
|
|
|
744,761 |
|
|
1,100,000
|
|
|
323,254 |
|
|
|
538,756 |
|
|
|
754,258 |
|
|
|
969,761 |
|
|
1,350,000
|
|
|
398,254 |
|
|
|
663,756 |
|
|
|
929,258 |
|
|
|
1,194,761 |
|
|
1,600,000
|
|
|
473,254 |
|
|
|
788,756 |
|
|
|
1,104,258 |
|
|
|
1,419,761 |
|
|
|
| (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 preceding an executive’s retirement. |
The average annual base salary and the years of Part B
credited service which may be considered in the Regular SERP
Benefit calculation as of December 31, 2004 for each of the
named executive officers are as follows: J. T.
Battenberg III — $1,567,500 —
42 years; Donald L. Runkle — $910,000 —
36 years; Alan S. Dawes — $834,000 —
23 years; Rodney O’Neal —
$729,000 — 32 years; and David B.
Wohleen — $690,000 — 26 years. The
annual base salary of each named executive officer for the most
recent year(s) considered in the calculation reported here is
shown in 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. The sum of the Delphi
Salaried Retirement Program’s benefits, plus the
Alternative SERP Benefit, will provide an eligible executive
with total annual retirement benefits equal to 1.5% times
eligible years of Part B credited service up to a maximum
of 35 years, times the average of the highest five of the
last ten years average annual total direct compensation, minus
100% of the maximum annual Social Security benefit in the year
of retirement payable to a person who is eligible for an
unreduced benefit.
117
The following table shows the estimated total annual Delphi
Salaried Retirement Program benefits (under Part A and
Part B) plus the Alternative SERP Benefit (assuming the
executive qualifies). The figures are based upon average annual
compensation as of December 31, 2004. Delphi would pay the
benefit in 12 equal monthly installments per year to executives
retiring in 2005 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Eligible Years of Part B Credited Service | |
| Average Annual Total Direct |
|
| |
| Compensation(1) |
|
15 | |
|
20 | |
|
25 | |
|
30 | |
|
35 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$ 680,000
|
|
$ |
130,512 |
|
|
$ |
181,512 |
|
|
$ |
232,512 |
|
|
$ |
283,512 |
|
|
$ |
334,512 |
|
|
1,360,000
|
|
|
283,512 |
|
|
|
385,512 |
|
|
|
487,512 |
|
|
|
589,512 |
|
|
|
691,512 |
|
|
2,040,000
|
|
|
436,512 |
|
|
|
589,512 |
|
|
|
742,512 |
|
|
|
895,512 |
|
|
|
1,048,512 |
|
|
2,720,000
|
|
|
589,512 |
|
|
|
793,512 |
|
|
|
997,512 |
|
|
|
1,201,512 |
|
|
|
1,405,512 |
|
|
3,400,000
|
|
|
742,512 |
|
|
|
997,512 |
|
|
|
1,252,512 |
|
|
|
1,507,512 |
|
|
|
1,762,512 |
|
|
4,080,000
|
|
|
895,512 |
|
|
|
1,201,512 |
|
|
|
1,507,512 |
|
|
|
1,813,512 |
|
|
|
2,119,512 |
|
|
|
| (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 preceding an executive’s
retirement. |
The average annual total direct compensation and the eligible
years of Part B credited service which may be considered in
the Alternative SERP calculation as of December 31, 2004
for each of the named executive officers is as follows: J. T.
Battenberg III — $3,296,500 —
35 years (capped at maximum); Donald L. Runkle —
$1,547,000 — 35 years (capped at maximum); Alan
S. Dawes — $1,441,400 — 23 years;
Rodney O’Neal — $1,294,400 —
32 years; and David B. Wohleen —
$1,220,000 — 26 years. The annual total direct
compensation of each named executive officer for the most recent
year(s) considered in the calculation reported here is reported
in the “Salary” and “Bonus” columns of the
Summary Compensation Table appearing earlier in this section.
The Regular SERP Benefit and the Alternative SERP Benefit can be
reduced or eliminated for both retirees and active employees by
Delphi’s Compensation and Executive Development Committee.
Related Party Transactions
As required by our bylaws, we have agreed to indemnify, to the
fullest extent permitted and in the manner required by the laws
of the State of Delaware, 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 of the Securities and Exchange Commission into
certain accounting matters. We have also agreed to indemnify
certain former and current employees in the same manner and to
the same extent. Our obligation to indemnify officers and our
voluntary indemnification of other employees, is subject to the
requirement in our bylaws that any indemnified person reimburse
us for any expenses we advance in the event such person’s
conduct is ultimately found to have been not in good faith, not
in the best interests of the company, or such person had
reasonable cause to believe his conduct was unlawful.
As disclosed on Form 8-K filed on May 18, 2005 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 will provide prior to retirement
effective July 1, 2005. Additionally, as disclosed on
Form 8-K filed on June 24, 2005 Delphi entered into a
special retention agreement with Mr. Rodney O’Neal,
president and chief operating officer.
118
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
provide 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; |
| |
| |
• |
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 |
119
|
|
|
| |
|
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
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
120
(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 place 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
Because Delphi believes that director compensation should be
aligned with the interests of our shareholders, we link a
significant component of our directors’ compensation to the
value of our stock. We do not pay directors who are also our
employees additional compensation for their service as directors
or committee members. In 2004, the compensation for our
non-management directors was structured as follows:
|
|
|
| |
• |
The lead independent director received an annual retainer of
$100,000 in cash and $200,000 in common stock units; |
| |
| |
• |
The other non-employee directors received an annual retainer of
$55,000 in cash and $85,000 in common stock units; |
| |
| |
• |
The chairman of the Audit Committee received an additional
retainer of $15,000 in cash; and |
| |
| |
• |
The chairman of the Compensation and Executive Development
Committee and the chairman of the Corporate Governance and
Public Issues Committee each received an additional retainer of
$10,000 in cash. |
The portion of each non-management director’s annual
compensation that is paid in common stock units is automatically
deferred until he or she no longer serves on our Board. The
outstanding common stock unit balance will accrue dividend
equivalents on a quarterly basis and be paid out in cash when
the Director leaves the Board.
Our non-management directors also have the option to defer the
cash portion of their fees into common stock units. They elect
to do so under Delphi’s Deferred Compensation Plan for
Non-Employee Directors (the “Deferred Compensation
Plan”).
As previously disclosed on a Form 8-K with the Securities
and Exchange Commission, on December 8, 2004 the
Compensation Committee, after reviewing industry and market
trends for board compensation and information provided by its
independent compensation consultant, amended and restated the
Deferred Compensation Plan. The amendment added a minimum share
holding requirement that must be satisfied prior to a director
being able to receive any portion of his or her annual
compensation in cash. The shareholding requirement is based on
three times the value of each director’s total annual
compensation and the historical value of the Company’s
common stock. Until a director has satisfied his or her minimum
holding requirement, 60% of such director’s annual
compensation (two-thirds for the lead non-employee director)
will be delivered in the form of common stock units with payout
automatically deferred until he or she no longer serves on our
Board. Once a director has satisfied his or her minimum holding
requirement, the director may receive up to 50% of his
compensation in cash, paid quarterly. At this time, all but two
of the Company’s non-employee directors have satisfied the
minimum holding requirement.
Under the amended Plan, a director may still elect to defer all
or a portion of compensation that he or she is entitled to
receive in cash into additional common stock units.
121
|
|
| 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, 2005 (unless another date
is indicated) by (i) each director (who was serving as a
director as of that date) and nominee for director,
(ii) each executive officer named in the Summary
Compensation Table appearing elsewhere in this 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, 2005
(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 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Stock | |
|
|
|
|
|
|
| |
|
|
|
which may | |
|
|
|
|
|
|
| |
|
Shares | |
|
be Acquired | |
|
|
|
|
|
|
| |
|
Beneficially | |
|
within 60 | |
|
|
|
|
|
Deferred Stock | |
| Name and Address(1) |
|
Owned(2) | |
|
Days(3) | |
|
Total | |
|
Percent | |
|
Unit(4) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
J. T. Battenberg III
|
|
|
530,440 |
|
|
|
4,497,386 |
|
|
|
5,027,826 |
|
|
|
* |
|
|
|
600,674 |
|
|
Oscar de Paula Bernardes Neto
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
* |
|
|
|
68,247 |
|
|
Robert H. Brust
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
* |
|
|
|
56,124 |
|
|
Virgis W. Colbert
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
* |
|
|
|
70,894 |
|
|
Alan S. Dawes(5)
|
|
|
152,513 |
|
|
|
— |
|
|
|
152,513 |
|
|
|
* |
|
|
|
8,714 |
|
|
David N. Farr
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
* |
|
|
|
46,715 |
|
|
Bernd Gottschalk
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
* |
|
|
|
62,169 |
|
|
Shoichiro Irimajiri
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
* |
|
|
|
66,436 |
|
|
Craig G. Naylor
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
* |
|
|
|
3,530 |
|
|
Cynthia A. Niekamp
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
* |
|
|
|
24,206 |
|
|
Rodney O’Neal
|
|
|
103,018 |
|
|
|
1,091,639 |
|
|
|
1,194,657 |
|
|
|
* |
|
|
|
213,595 |
|
|
John D. Opie
|
|
|
10,000 |
|
|
|
— |
|
|
|
10,000 |
|
|
|
* |
|
|
|
124,918 |
|
|
Donald L. Runkle
|
|
|
119,876 |
|
|
|
1,221,086 |
|
|
|
1,340,962 |
|
|
|
* |
|
|
|
141,565 |
|
|
David B. Wohleen
|
|
|
95,239 |
|
|
|
1,078,092 |
|
|
|
1,173,331 |
|
|
|
* |
|
|
|
193,093 |
|
|
Dodge & Cox(6),
|
|
|
73,561,123 |
|
|
|
— |
|
|
|
73,561,123 |
|
|
|
13.1 |
% |
|
|
— |
|
| |
One Sansome Street,
35th
Floor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
San Francisco, CA 94104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Research & Management Company(7),
|
|
|
72,055,000 |
|
|
|
— |
|
|
|
72,055,000 |
|
|
|
12.8 |
% |
|
|
— |
|
| |
333 South Hope St., |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Los Angeles, CA 90071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Group International, Inc.(8),
|
|
|
33,356,270 |
|
|
|
— |
|
|
|
33,356,270 |
|
|
|
5.9 |
% |
|
|
— |
|
| |
11100 Santa Monica Blvd., |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Los Angeles, CA 90025-3384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Street Bank and Trust Company,
|
|
|
75,725,697 |
|
|
|
— |
|
|
|
75,725,697 |
|
|
|
13.5 |
% |
|
|
— |
|
| |
in various fiduciary capacities(9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
225 Franklin Street, Boston, MA 02110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (17 persons)(10)
|
|
|
1,147,161 |
|
|
|
9,455,990 |
|
|
|
10,603,151 |
|
|
|
* |
|
|
|
1,967,877 |
|
|
|
| * |
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
May 31, 2005. |
122
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. |
| |
| (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 |
| |
| |
• |
Which the named person holds in the Delphi Corporation
Savings-Stock Purchase Program for Salaried Employees in the
United States. |
|
|
|
| |
• |
Stock options exercisable and restricted stock units which vest
within 60 days of May 31, 2005. |
|
|
|
| |
• |
Restricted stock units subject to a vesting schedule, forfeiture
risk and other restrictions. The restricted stock units earn
dividend equivalents at the same rate as dividends paid to
stockholders. Restricted stock units have no voting or
disposition rights until vested. Does not include restricted
stock units vesting within 60 days of May 31, 2005
which have been included in the Total column. |
| |
| |
• |
Phantom shares denominated in common stock units under the
Delphi Benefit Equalization Plan-Savings. This is a
non-qualified “excess benefit” plan that is exempt
from ERISA and IRS code limitations and provides executives with
full Delphi matching contributions without regard to limits
imposed by the IRS code. Amounts credited under the plan are
maintained in share units of Delphi common stock. After leaving
Delphi, an employee may at any time choose to receive a complete
distribution of amounts in the Benefit Equalization Plan, which
will be in cash. Common stock units have no voting rights. |
| |
| |
• |
Common stock units held by non-management directors under
Delphi’s Deferred Compensation Plan for Non-Employee
Directors. Common stock units have no voting rights. Dividend
equivalents on any common stock units accrue quarterly and are
converted into additional common stock units. Directors receive
the cash value of all of their accumulated stock units after
they leave the Board. |
|
|
| (5) |
Mr. Dawes resigned from the Company effective March 4,
2005. Therefore, the information with respect to his holdings is
as of March 31, 2005. |
| |
| (6) |
Based on a Schedule 13G/ A dated February 10, 2005
filed by Dodge & Cox with the Securities and Exchange
Commission. |
| |
| (7) |
Based on a Schedule 13G/ A dated April 8, 2005 filed
by Capital Research & Management Company with the Securities
and Exchange Commission. |
| |
| (8) |
Based on a Schedule 13G/ A dated February 11, 2005
filed by Capital Group International, Inc. with the Securities
and Exchange Commission. |
| |
| (9) |
Based on a Schedule 13G/ A dated February 22, 2005
filed by State Street Bank and Trust Company with the Securities
and Exchange Commission. Represents shares held by State Street
Bank and Trust Company as trustee for various Delphi employee
benefit plans and in various other fiduciary capacities. |
|
|
| (10) |
Includes Messrs. Dawes and Runkle, who are no longer
executive officers of the Company. |
123
Related Stockholder Matters
Delphi has authorized future issuances of common stock to its
named executive officers and other employees, pursuant to
options granted under equity compensation plans. The table below
summarizes the options outstanding against those plans as of
December 31, 2004. 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 Form 10-K.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of securities | |
|
|
|
Number of securities | |
| |
|
to be issued | |
|
Weighted-average | |
|
remaining available | |
| |
|
upon 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
|
|
|
72,675 |
|
|
$ |
12.61 |
|
|
|
25,192 |
|
|
Equity compensation plans not approved by stockholders
|
|
|
25,068 |
|
|
$ |
16.46 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
97,743 |
|
|
$ |
13.68 |
|
|
|
25,192 |
|
| |
|
|
|
|
|
|
|
|
|
Notes
|
|
| (1) |
Includes approximately 65.3 million outstanding options and
approximately 7.4 million outstanding restricted stock
units. |
| |
| (2) |
Includes weighted-average exercise price of outstanding options
only. |
|
|
| ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
During 2004 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. See Item 11, Executive Compensation for
certain related party transactions occurring during the first
half of 2005.
|
|
| ITEM 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
As of December 31, 2004, the Audit Committee of our Board
of Directors consisted of Robert H. Brust, Oscar de Paula
Bernardes Neto, Cynthia A. Niekamp, and John D. Opie (ex
officio), all of whom are independent for purposes of New York
Stock Exchange Listing Requirements and the U.S. Securities
and Exchange Commission’s rules promulgated under the
Sarbanes-Oxley Act of 2002.
Independent Auditors Fees
The following table breaks out the components of aggregate fees
billed to Delphi by Deloitte & Touche LLP, the member
firms of Deloitte & Touche Tohmatsu, and their
respective affiliates (collectively, “Deloitte”), for
services in 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
($ in millions) | |
|
Audit Fees
|
|
|
14.0 |
|
|
|
9.2 |
|
|
Audit-Related Fees
|
|
|
0.6 |
|
|
|
0.8 |
|
|
Tax Fees
|
|
|
1.1 |
|
|
|
1.3 |
|
|
All Other Fees
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Total
|
|
|
15.7 |
|
|
|
11.3 |
|
| |
|
|
|
|
|
|
|
Memo: Ratio of Tax and All Other Fees to Audit and Audit-Related
Fees
|
|
|
0.1:1 |
|
|
|
0.1:1 |
|
| |
Percentage of Aggregate Fees which were Audit or Audit-Related
|
|
|
93 |
% |
|
|
88 |
% |
124
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 10Q, statutory audits of certain of the
Company’s subsidiaries, attestation of management’s
assessment of internal control over financial reporting as of
December 31, 2004 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 2004
($0.8 million in 2003). |
| |
| |
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 $0.7 million in 2004
($0.5 million in 2003). |
In considering the nature of the services provided by Deloitte
in 2004, 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 in 2004 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 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.
During 2003, 5.7% of audit-related fees (representing 0.4% of
total fees) were approved by the Audit Committee pursuant to the
de minimis exception provided in 17 CFR 210.2-01
(c)(7)(i)(C) as promulgated by the U.S. Securities and
Exchange Commission.
125
PART IV
|
|
| ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| |
|
|
|
|
|
|
|
| |
|
|
|
Page No. | |
| |
|
|
|
| |
|
(a) 1. Financial Statements: |
|
|
|
|
|
—
|
|
Management’s Report on Internal Control over Financial
Reporting |
|
|
54 |
|
|
—
|
|
Report of Independent Registered Public Accounting Firm |
|
|
55 |
|
|
—
|
|
Report of Independent Registered Public Accounting Firm |
|
|
57 |
|
|
—
|
|
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002 |
|
|
58 |
|
|
—
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003 |
|
|
59 |
|
|
—
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 |
|
|
60 |
|
|
—
|
|
Consolidated Statements of Stockholders’ Equity for the
Years Ended December 31, 2004, 2003 and 2002 |
|
|
61 |
|
|
—
|
|
Notes to Consolidated Financial Statements |
|
|
62 |
|
|
2. Financial Statement Schedules- |
|
|
|
|
|
—
|
|
Valuation and qualifying account schedule for the Years Ended
December 31, 2004, 2003, and 2002 |
|
|
103 |
|
|
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) |
|
|
By-laws of Delphi Corporation, incorporated by reference to
Exhibit 3.2 to Delphi’s Registration Statement on
Form S-1 (Registration No. 333-67333) (hereinafter
referred to as the “Registration Statement”). |
| |
| |
(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
61/8% Notes
due 2004,
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. |
| |
| |
(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. |
126
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Name |
| |
|
|
| |
| |
(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. |
| |
| |
(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. |
127
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Name |
| |
|
|
| |
| |
(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, filed as an exhibit to this
report.* |
| |
| |
(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) |
|
|
364-Day Sixth Amended and Restated Competitive Advance and
Revolving Credit Facility, dated as of June 18, 2004, among
Delphi and the lenders named therein, incorporated by reference
to Exhibit 10(a) to Delphi’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004 and amended
by First Amendment and Waiver to 364-Day Sixth Amended and
Restated Competitive Advance and Revolving Credit Facility dated
as of March 28, 2005, which is incorporated by reference to
Exhibit 99 (a) to Delphi’s Report on Form 8-K
dated May 22, 2005. |
| |
| |
(10)(n) |
|
|
Five Year Second Amended and Restated Competitive Advance and
Revolving Credit Facility, dated as of June 18, 2004, among
Delphi and the lenders named therein, incorporated by reference
to Exhibit 10(b) to Delphi’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004 and amended
by First Amendment and Waiver to Five Year Second Amended and
Restated Competitive Advance and Revolving Credit Facility dated
as of March 28, 2005, which is incorporated by reference to
Exhibit 99(b) to Delphi’s Report on Form 8-K
dated May 22, 2005. |
| |
| |
(10)(o) |
|
|
Five Year Third Amended and Restated Credit Agreement dated as
of June 14, 2005 incorporated by reference to
Exhibit 99(a) to Delphi’s Report on Form 8-K
dated June 14, 2005. |
| |
| |
(10)(p) |
|
|
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)(q) |
|
|
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)(r) |
|
|
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)(s) |
|
|
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)(t) |
|
|
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)(u) |
|
|
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
dated May 13, 2005.* |
| |
| |
(10)(v) |
|
|
Special Separation Agreement & Release dated
May 13, 2005 incorporated by reference to
Exhibit 99(b) to Delphi’s Report on Form 8-K
dated May 13, 2005* |
| |
| |
(10)(w) |
|
|
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 dated
March 1, 2005.* |
128
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Name |
| |
|
|
| |
| |
(10)(x) |
|
|
Standstill Agreement with Capital Group Companies, Inc. dated
May 10, 2005 incorporated by reference to
Exhibit 99(b) to Delphi’s Report on Form 8-K dated
May 11, 2005. |
| |
| |
(12) |
|
|
Computation of Ratios of Earnings to Fixed Charges for the Years
Ended December 31, 2004, 2003, 2002, 2001, and 2000. |
| |
| |
(14) |
|
|
The Delphi Foundation for Excellence, a Guide to Representing
Delphi with Integrity, as amended on December 15, 2004,
filed as an exhibit to this report. |
| |
| |
(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 |
| |
| |
(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. |
| |
| |
(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 |
129
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/ J. T.
Battenberg III
|
|
|
| |
|
| |
(J. T. Battenberg III, 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 June 30, 2005 by the
following persons on behalf of the registrant and in the
capacities indicated.
| |
|
|
| Signature |
|
Title |
| |
|
|
| |
/s/ J. T.
Battenberg III
(J.
T. Battenberg III) |
|
Chairman of the Board & Chief Executive Officer
(Principal Executive Officer) |
| |
/s/ Rodney O’Neal
(Rodney
O’Neal) |
|
Director, President & Chief Operating Officer |
| |
/s/ John D. Sheehan
(John
D. Sheehan) |
|
Acting Chief Financial Officer, Chief Accounting Officer and
Controller (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 |
| |
/s/ Shoichiro Irimajiri
(Shoichiro
Irimajiri) |
|
Director |
| |
/s/ Craig G. Naylor
(Craig
G. Naylor) |
|
Director |
| |
/s/ Cynthia A. Niekamp
(Cynthia
A. Niekamp) |
|
Director |
130
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
10(j) |
|
|
Delphi Corporation Amended and Restated Deferred Compensation
Plan for Non-Employee Directors |
| |
| |
12 |
|
|
Computation of Ratios of Earnings to Fixed Charges for the Years
Ended December 31, 2004, 2003, 2002, 2001, and 2000 |
| |
14 |
|
|
The Delphi Foundation for Excellence, A Guide to Representing
Delphi with Integrity, as amended on December 15, 2004 |
| |
21 |
|
|
Subsidiaries of Delphi |
| |
23 |
|
|
Consent of Deloitte & Touche LLP |
| |
31(a) |
|
|
Certification of Chief Executive Officer pursuant to
Section 302 |
| |
31(b) |
|
|
Certification of Chief Financial Officer pursuant to
Section 302 |
| |
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 |