UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2007

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from                 to                .

 

Commission file number: 1-14787

DELPHI CORPORATION

(Exact name of registrant as specified in its charter)

 

 

(248) 813-2000

(Registrant’s telephone number, including area code)

 

       Securities registered pursuant to Section 12(b) of the Act: None

 Securities registered pursuant to Section 12(g) of the Act:

 

Title of class

 

Common Stock, $0.01 par value per share (including the associated Preferred Share Purchase Rights)

61/2% senior notes due May 1, 2009

71/8% debentures due May 1, 2029

81/4% Cumulative Trust Preferred Stock of Delphi Trust I

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o.

 

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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ.

 

As of June 29, 2007, 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 $1.3 billion. The closing price of the Common Stock on June 29, 2007 as reported on Pink Sheets, LLC, a quotation service for over the counter securities, was $2.37 per share. As of June 29, 2007, the number of shares outstanding of the registrant’s Common Stock was 561,781,590 shares.

 

The number of shares outstanding of the registrant’s Common Stock, $0.01 par value per share as of January 31, 2008, was 563,477,461.

 

DOCUMENTS INCORPORATED BY REFERENCE

Not applicable.

Website Access to Company’s Reports

Delphi’s internet website address is www.delphi.com. Our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.

 

 

DELPHI CORPORATION

 

INDEX

 

 

 

 

As further described below, Delphi Corporation (referred to as “Delphi,” the “Company,” “we,” or “our”) and certain of its United States (“U.S.”) subsidiaries filed voluntary petitions for reorganization relief under chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of New York (the “Court”) and are currently operating as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. Delphi’s non-U.S. subsidiaries were not included in the filings, have continued their business operations without supervision from the Court and are not subject to the requirements of the Bankruptcy Code.

 

Overview. Delphi is a leading global supplier of mobile electronics and transportation systems, including powertrain, safety, thermal, controls and security systems, electrical/electronic architecture, and in-car entertainment technologies. Engineered to meet and exceed the rigorous standards of the automotive industry, Delphi technology is also found in computing, communications, energy and medical applications. Delphi was incorporated in 1998 in contemplation of its separation from GM in 1999 (the “Separation”). Technology developed and products manufactured by Delphi are changing the way drivers interact with their vehicles. Delphi is a leader in the breadth and depth of technology to help make cars and trucks smarter, safer and better. The Company supplies products to nearly every major global automotive original equipment manufacturer.

 

In addition, since the Separation, Delphi has diversified its customer base by taking advantage of its technological and manufacturing core competencies. Delphi has entered and continues to pursue additional opportunities in adjacent markets such as in communications (including telematics), computer components, automotive aftermarket, energy and the medical devices industry.

 

We have extensive technical expertise in a broad range of product lines and strong systems integration skills, which enable us to provide comprehensive, systems-based solutions to vehicle manufacturers (“VMs”). We have established an expansive global presence, with a network of manufacturing sites, technical centers, sales offices and joint ventures located in major regions of the world. We operate our business along the following reporting operating segments that are grouped on the basis of similar product, market and operating factors:

 

 

We also have non-core steering and halfshaft product lines and interiors and closures product lines that are reported in discontinued operations for accounting purposes. Previously, the steering and halfshaft product line was a separate operating segment and the interiors and closures product line was part of our Automotive Holdings Group segment. Refer to Note 5. Discontinued Operations to the consolidated financial statements for more information.

 

Chapter 11 Cases. On October 8, 2005 (the “Petition Date”), Delphi and certain of its U.S. subsidiaries (the “Initial Filers”) filed voluntary petitions for reorganization relief under chapter 11 of the Bankruptcy Code, and on October 14, 2005, three additional U.S. subsidiaries of Delphi (together with the Initial Filers, collectively, the “Debtors”) filed voluntary petitions for reorganization relief under the Bankruptcy Code (collectively, the Debtors’ October 8, 2005 and October 14, 2005 filings are referred to herein as the “Chapter 11 Filings”). The Court is jointly administering these cases as “In re Delphi Corporation, et al., Case No. 05-44481 (RDD).” The Debtors continue to operate their businesses as debtors-in-possession under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and Court orders. In general, as debtors-in-possession, the Debtors are authorized under chapter 11 of the Bankruptcy Code to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Court. All vendors are being paid for all goods furnished and services provided in the ordinary course of business after the Petition Date.

 

Delphi’s non-U.S. subsidiaries were not included in the filings, continue their business operations without supervision from the Court and are not subject to the requirements of the Bankruptcy Code. Nevertheless, we have been and will continue to seek to optimize our global manufacturing footprint to lower our overall cost structure. In particular, in February 2007, Delphi’s indirect wholly-owned Spanish subsidiary, Delphi Automotive Systems España, S.L. (“DASE”), announced the planned closure of its sole operation at the Puerto Real site in Cadiz, Spain. The closure of this facility is consistent with Delphi’s transformation plan previously announced in March 2006. The facility, which had approximately 1,600 employees, was the primary holding of DASE. On March 20, 2007, DASE filed a petition for Concurso, or bankruptcy under Spanish law, exclusively for that legal entity. In an order dated April 13, 2007, the Spanish court declared DASE to be in voluntary Concurso, which provided DASE support by managing the process of closing the Puerto Real site in Cadiz, Spain in accordance with applicable Spanish law. Refer to Note 2. Transformation Plan and Chapter 11 Bankruptcy to the consolidated financial statements for more information.

 

First Day and Other Operational Orders. At the commencement of the chapter 11 cases, the Court entered a number of orders intended to generally stabilize the Debtors’ operations and allow the Debtors to operate substantially in the ordinary course of business. These orders covered, among other things, human capital obligations, supplier relations, customer relations, business operations (including payment of certain prepetition payables to certain shippers, warehousemen and contractors), cash management, and retention of certain professional service providers.

 

Statutory Committees. On October 17, 2005, the Court formed a committee of unsecured creditors in the chapter 11 cases (the “Creditors’ Committee”). On April 28, 2006, the U.S. Trustee, acting pursuant to the Court’s order issued March 30, 2006, formed an equity committee, to represent holders of Delphi’s common stock in the chapter 11 cases (the “Equity Committee”). The Creditors’ Committee and the Equity Committee supported Delphi’s Amended Plan as described below under “Plan of Reorganization, Transformation Plan.”

 

Debtor-in-Possession Financing. On October 28, 2005, the Court entered an order granting Delphi’s request for $2.0 billion in senior secured debtor-in-possession (“DIP”) financing provided by a group of lenders led by JPMorgan Chase Bank and Citigroup Global Markets, Inc. The Court also approved an adequate protection package for Delphi’s outstanding $2.5 billion prepetition secured indebtedness under its prepetition credit facility. The proceeds of the DIP financing together with cash generated from daily operations and cash on hand were used to fund postpetition operating expenses, including supplier obligations and employee wages, salaries and benefits. On January 5, 2007, the Court granted Delphi’s motion to obtain replacement postpetition financing of approximately $4.5 billion to refinance both its $2.0 billion DIP financing and Delphi’s $2.5 billion prepetition secured indebtedness. On January 9, 2007, Delphi entered into

a Revolving Credit, Term Loan, and Guaranty Agreement (the “Refinanced DIP Credit Facility”) to borrow up to approximately $4.5 billion from a syndicate of lenders. The Refinanced DIP Credit Facility consists of a $1.75 billion first priority revolving credit facility (“Tranche A” or the “Revolving Facility”), a $250 million first priority term loan (“Tranche B” or the “Tranche B Term Loan” and, together with the Revolving Facility, the “First Priority Facilities”), and an approximately $2.5 billion second priority term loan (“Tranche C” or the “Tranche C Term Loan”). Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources in this Annual Report for further details on Delphi’s sources and uses of liquidity and for a more detailed description of the terms of Delphi’s Refinanced DIP Credit Facility, as amended through the date hereof.

 

Trading Order. On January 6, 2006, the Court approved a motion to restrict, in certain circumstances and subject to certain terms and conditions, trading in securities and claims of Delphi by persons who would acquire, or dispose of, substantial amounts of such securities and claims. The order also requires, in certain circumstances and subject to certain terms and conditions, substantial holders of indebtedness of the Debtors to dispose of such indebtedness. This order was intended to preserve the availability of the benefit of certain tax attributes of the Debtors.

 

Contract Rejection and Assumption Process. Section 365 of the Bankruptcy Code permits the Debtors to assume, assume and assign, or reject certain prepetition executory contracts subject to the approval of the Court and certain other conditions. Rejection constitutes a Court-authorized breach of the contract in question and, subject to certain exceptions, relieves the Debtors of their future obligations under such contract but creates a deemed prepetition claim for damages caused by such breach or rejection. Parties whose contracts are rejected may file claims against the rejecting Debtor for damages. Generally, the assumption, or assumption and assignment, of an executory contract requires the Debtors to cure all prior defaults under such executory contract and to provide adequate assurance of future performance. Additional liabilities subject to compromise and resolution in the chapter 11 cases have been asserted as a result of damage claims created by the Debtors’ rejection of executory contracts. For additional information, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Plan of Reorganization and Transformation Plan in this Annual Report.

 

Treatment of Prepetition Claims; Proofs of Claim. Under section 362 of the Bankruptcy Code, actions to collect most of the Debtors’ prepetition liabilities, including payments owing to vendors in respect of goods furnished and services provided prior to the Petition Date, are automatically stayed and other contractual obligations of the Debtors generally may not be enforced. Shortly after the Petition Date, the Debtors began notifying all known actual or potential creditors of the Debtors for the purpose of identifying all prepetition claims against the Debtors. The Chapter 11 Filings triggered defaults on substantially all debt obligations of the Debtors. The stay of proceedings provisions of section 362 of the Bankruptcy Code, however, also apply to actions to collect prepetition indebtedness or to exercise control over the property of the Debtors’ estate in respect of such defaults. On April 12, 2006, the Court entered an order establishing July 31, 2006 as the bar date. The bar date was the date by which claims against the Debtors arising prior to the Debtors’ Chapter 11 Filings were required to be filed if the claimants wish to receive any distribution in the chapter 11 cases. On April 20, 2006, the Debtors commenced notification, including publication, to all known actual and potential creditors, informing them of the bar date and the required procedures with respect to the filing of proofs of claim with the Court. The rights of and ultimate payments by the Debtors under prepetition obligations are set forth in the Amended Plan, as referenced below. For additional information, refer to Item 7. Management’s Discussion and Analysis and Results of Operations — Plan of Reorganization and Transformation Plan in this Annual Report and Note 13. Liabilities Subject to Compromise to the consolidated financial statements in this Annual Report.

 

Plan of Reorganization and Transformation Plan. On September 6, 2007 Delphi filed its proposed plan of reorganization (the “Plan”) and related disclosure statement (the “Disclosure Statement”) with the Court. The Plan and Disclosure Statement outline Delphi’s transformation centering around five core areas, including agreements reached with each of Delphi’s principal U.S. labor unions and GM, a plan to streamline our product portfolio and make the necessary manufacturing alignment with our new focus, transform our cost structure and resolve our pension funding situation. At a Court hearing on September 27, 2007, Delphi stated

that the current dynamics of the capital markets prompted Delphi to consider whether amendments to the Plan filed on September 6 might be necessary. Delphi commenced its Disclosure Statement hearing on October 3, 2007, and after resolving certain objections, requested that the hearing continue on October 25, 2007. During October and November, the Court granted additional requests by Delphi to further continue the hearing on the adequacy of the Disclosure Statement to allow Delphi to negotiate potential amendments to the Plan and the related agreements with its stakeholders, including the comprehensive agreements reached with GM and the Equity Purchase and Commitment Agreement (“EPCA”) between Delphi and certain affiliates of lead investor Appaloosa Management L.P. (“Appaloosa”), Harbinger Capital Partners Master Fund I, Ltd. (“Harbinger”), Pardus Capital Management, L.P. (“Pardus”) and Merrill Lynch, Pierce, Fenner & Smith, Incorporated (“Merrill”), UBS Securities LLC (“UBS”), and Goldman Sachs & Co. (“Goldman”) (collectively the “Investors”), dated August 3, 2007 and ultimately amended on December 10, 2007. On December 3, 2007, Delphi filed further potential amendments to the Plan, the comprehensive agreements reached with GM, the EPCA, and the related Disclosure Statement and on December 4, 2007 Delphi announced that it had reached agreement in principle on these amendments with the Creditors’ Committee, the Equity Committee, GM, and the Investors. After a hearing on the adequacy of the proposed Disclosure Statement on December 6 and 7, 2007, on December 10, 2007, Delphi filed its first amended joint Plan of Reorganization (“Amended Plan”) and its first amended Disclosure Statement with respect to the Amended Plan (“Amended Disclosure Statement”). The Court entered an order approving the adequacy of the Amended Disclosure Statement on December 10, 2007. After entry of the order approving the Amended Disclosure Statement, Delphi began solicitation of votes on the Amended Plan. On January 16, 2008, Delphi filed further modifications to the Amended Plan. Additional modifications are set forth in Exhibit A to the Confirmation Order entered by the Court on January 25, 2008, after conclusion of a hearing on confirmation of the Amended Plan that took place on January 17, 18, and 22, 2008.

 

In accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), the cost related to the transformation plan will be recognized in the Company’s consolidated financial statements as elements of the Amended Plan, the U.S. labor agreements, and the comprehensive settlement agreements with GM become effective. The Amended Plan and agreements will significantly impact Delphi’s accounting for its pension plans, post-retirement benefit plans, other employee related benefits, long-lived asset impairments and exit costs related to the sites planned for closure or consolidation, compensation costs for labor recognized over the term of the U.S. labor agreements, and the fair values assigned to assets and liabilities upon Delphi’s emergence from chapter 11, among others. Such adjustments will have a material impact on Delphi’s financial statements.

 

Effectiveness of the Amended Plan is subject to a number of conditions, including the completion of the transactions contemplated by the EPCA, the entry of certain orders by the Court and the obtaining of exit financing. The transactions contemplated by the EPCA also are subject to a number of conditions. On November 6, 2007, the Court entered an order authorizing the Debtors to enter into and perform all obligations under a “best efforts” engagement letter and fee letter with JPMorgan Securities Inc., JPMorgan Chase Bank, N.A. and Citigroup Global Markets Inc., in connection with an exit financing arrangement comprised of: (i) a senior secured first lien asset-based revolving credit facility in an aggregate principal amount of $1.6 billion; (ii) a senior secured first-lien term facility in an aggregate amount of $3.7 billion; and (iii) a senior secured second-lien term facility in the amount of $1.5 billion. There can be no assurances that such exit financing will be obtained or such other conditions will be satisfied, and we cannot assure you that the Amended Plan will become effective on the terms described herein or at all. For a discussion of certain risks and uncertainties related to the Debtors’ chapter 11 cases and reorganization objectives refer to Item 1A. Risk Factors in this Annual Report.

 

If the Amended Plan does not become effective as described herein, no assurance can be given as to what values, if any, will be ascribed in the chapter 11 cases to each of these constituencies or what types or amounts of distributions, if any, they would receive. If certain requirements of the Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstanding its rejection by a company’s equity security holders and notwithstanding the fact that such equity security holders do not receive or retain any property on account of their equity interests under the plan. Accordingly, the Company urges that appropriate caution be exercised

with respect to existing and future investments in its common stock or other equity securities, or any claims relating to prepetition liabilities.

 

For more detailed information regarding the current status of our chapter 11 cases as relevant to the consolidated financial statements and results of operation of Delphi and its subsidiaries, and the terms of the Amended Plan, including potential recoveries to stakeholders, the agreements reached with our U.S. labor unions and comprehensive settlement agreements reached with GM, and the terms of the EPCA, see Item 7. Management’s Discussion & Analysis and Results of Operations — Plan of Reorganization and Transformation Plan.

 

Additional information on Delphi’s filing under the Bankruptcy Code, including access to Court documents and other general information about the chapter 11 cases, is available online at www.delphidocket.com. Financial information available on that website generally is prepared according to the requirements of federal bankruptcy law. While such financial information accurately reflects information required under federal bankruptcy law, such information may be unconsolidated, unaudited, and prepared in a format different from that used in Delphi’s consolidated financial statements prepared in accordance with U.S. GAAP and filed under the U.S. securities laws. Moreover, the materials filed with the Court are not prepared for the purpose of providing a basis for an investment decision relating to Delphi’s stock or debt or for comparison with other financial information filed with the U.S. Securities and Exchange Commission (“SEC”).

 

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. The VM market is characterized by short-term volatility, with overall expected long-term growth of vehicle sales and production. Demand for automotive parts in the VM market is generally a function of the number of new vehicles produced, which is primarily driven by macro-economic factors such as interest rates, fuel prices, consumer confidence, employment and other trends. Although VM demand is tied to planned vehicle production, the automotive parts industry also has the opportunity to grow through increasing product content per vehicle, further penetrating business with existing customers and by gaining new customers and markets. Companies with a global presence and advanced technology, engineering, manufacturing and customer support capabilities are best positioned to take advantage of these opportunities.

 

We believe that continuously increasing demands of society have created the emergence of three “mega-trends” that will serve as the basis for the next wave of market-driven technology advancement. Delphi’s challenge is to continue developing leading edge technology focused on addressing these mega-trends, apply that technology toward products with sustainable margins that enable our customers, both VMs and others, to produce distinctive market-leading products, and use the chapter 11 process to address the competitiveness of our core U.S. operations and lower our overall cost structure. As part of our transformation plan we have identified a core portfolio of products that draw on our technical strengths and align with these “mega-trends” where we believe we can provide differentiation to our automotive, aftermarket, and adjacent markets customers. For more information on our core product portfolio refer to Item 1. Business — Products and Competition in this Annual Report.

 

Safe. The first mega-trend — “Safe,” represents technologies aimed not just at protecting vehicle occupants when a crash occurs, but those that actually proactively mitigate the risk of a crash occurring. VMs continue to focus on improving occupant and pedestrian safety 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 advanced occupant protection systems, lane departure warning systems and collision avoidance technologies.

 

Green. The second mega-trend — “Green,” represents technologies designed to help reduce emissions, increase fuel economy and minimize the environmental impact of vehicles. VMs continue to focus on improving fuel efficiency and reducing emissions in order to meet increasingly stringent regulatory requirements in various markets. As a result, suppliers are competing intensely to develop and market new and

alternative technologies, such as hybrid vehicles, fuel cells, and diesel engines to improve fuel economy and emissions. Green is a key mega-trend today because of the convergence of several issues: global warming, higher oil prices, increased concern about oil dependence, and recent and pending legislation in the U.S. and overseas regarding fuel economy and carbon dioxide emissions.

 

Connected. The third mega-trend — “Connected,” represents technologies designed to seamlessly integrate the highly complex electronic world in which automotive consumers live, into the cars that they drive, so that time in a vehicle is more productive and enjoyable. The technology content of vehicles continues to increase as consumers demand greater safety, personalization, entertainment, productivity and convenience while driving. Advanced technologies offering mobile voice and data communication such as those used in our mobile electronics products coupled with global positioning systems and in-vehicle entertainment continue to be key products in the transportation industry.

 

These mega-trends are expected to create growth and opportunity for VMs and their suppliers that can meet these consumer demands. In response to these mega-trends, which are largely driven by consumer demand for greater vehicle performance, functionality and affordable convenience options that take advantage 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, VMs are expanding the electronic and technological content of vehicles. 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.

 

Additionally, Delphi believes that several key operational trends have reshaped the automotive parts industry over the past several years. These trends are impacting product design and focus, VM sourcing decisions and global footprint. In addition, increasing competition from non-U.S. suppliers coupled with lower volumes of domestic VMs is driving further consolidation in the domestic supplier industry.

 

Increased Emphasis on Systems and Modules Sourcing. To simplify the vehicle design and assembly processes and reduce costs, VMs increasingly look to their suppliers to provide fully engineered systems and pre-assembled combinations of components rather than individual components. By offering sophisticated systems and modules rather than individual components, Tier 1 suppliers such as Delphi have assumed many of the design, engineering, research and development, and assembly functions traditionally performed by VMs.

 

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. 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.

 

Pricing Pressures. The cost-cutting initiatives adopted by VMs result in increased downward pressure on pricing. Our customer supply agreements generally require step downs in component pricing over the period of production. VMs historically have had significant leverage over their outside suppliers because the automotive component supply industry is fragmented and serves a limited number of automotive VMs, and, as such, Tier 1 suppliers are subject to substantial continuing pressure from VMs to reduce the price of their products. We anticipate continued pricing pressure as VMs pursue restructuring and cost cutting initiatives.

 

Global Capability, Industry Consolidation and Restructuring. In order to serve multiple markets in a more cost-effective manner, many VMs are turning to global vehicle platforms, which typically are designed in one location but produced and sold in various 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 industry consolidation as suppliers work to establish capabilities within the major regions, as they follow their customers. 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. Additionally, the combination of decreasing volumes of domestic VMs, and increasing competition from non-U.S. VMs and transplant suppliers, who generally have lower and more flexible cost structures, have accelerated the pace of consolidation and the need of many domestic suppliers, including Delphi, to restructure operations and refocus product design and development to enable them to compete more effectively.

 

Research, Development and Intellectual Property

 

Delphi maintains technical engineering centers in major regions 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, 2007, we employed approximately 18,500 engineers, scientists and technicians around the world, including 16,000 at our technical centers and customer centers, with over one-third focused on electronic and high technology products, including software algorithm development. We believe that our engineering and technical expertise, together with our emphasis on continuing research and development, allow us to use the latest technologies, materials and processes to solve problems for our customers and to bring new, innovative products to market. We believe that continued research and development activities (including engineering) are critical to maintaining our pipeline of technologically advanced products, and during 2007 we maintained our total expenditures for research and development activities (including engineering) despite cost pressures in other aspects of our business. Total expenditures for research and development activities (including engineering) were approximately $2.0 billion, $2.0 billion, and $2.1 billion for the years ended December 31, 2007, 2006, and 2005, respectively. We seek to maintain our research and development activities in a more focused product portfolio and to allocate our capital and resources to those products with distinctive technologies and greater electronics content; however, our ability to do so will depend significantly on our ability to continue to generate sufficient cash from operations over and above that which is needed to support ongoing operations and the significant reorganization activity planned.

 

We have generated a significant number of patents in the operation of our business. While no individual patent taken alone is considered material to our business, taken in the aggregate, these patents provide meaningful protection for Delphi’s products and technical innovations. Similarly, while our trademarks are important to identify Delphi’s position in the industry, and we have obtained certain licenses to use intellectual property owned by others, we do not believe that any of these are individually material to our business. We are actively pursuing marketing opportunities to commercialize and license our technology to both automotive and non-automotive industries. This leveraging activity is expected to further enhance the value of our intellectual property portfolio.

 

Materials

 

The principal raw materials we use to manufacture our products include aluminum, copper, resins, and steel. 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.

 

For the past three years, we were challenged by commodity cost increases, most notably steel, resins, aluminum and copper. We continue to proactively work with our suppliers and customers to manage these cost pressures. Despite our efforts, surcharges and other cost increases, particularly when necessary to ensure the continued financial viability of a key supplier, had the effect of reducing our earnings during 2007. In the case of copper, contract escalation clauses have enabled us to pass on some of the price increases to our customers and thereby partially offset the impact of contractual price reductions on net sales for the related products, though in some cases there is a lapse of time before we are able to pass price increases through to our customers. To date, due to existing contractual terms, our success in passing commodity cost increases on to our customers has been limited. As contracts with our customers expire, we will seek to renegotiate terms that allow us to recover the actual commodity costs we are incurring. Steel supply has continued to be constrained and commodity cost pressures intensified as our supply contracts expired during 2007. We expect commodity

cost pressures will continue during 2008. 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. Additionally, Delphi manages its exposure to fluctuations in certain commodity prices, particularly various non-ferrous metals used in our manufacturing operations, by entering into a variety of forward contracts and swaps with various counterparties. We expect to be continually challenged to maintain costs as demand for our principal raw materials will be significantly impacted by demand in emerging markets, particularly in China and India. Despite the challenges identified above, in 2007 Delphi achieved net material performance (including cost adjustments from suppliers, material cost improvement initiatives and commodity market changes) on a year-over-year basis.

 

Employees-Union Representation

 

As of December 31, 2007, we employed approximately 169,500 people (28,400 in the U.S., and 141,100 outside of the U.S.): approximately 36,100 salaried employees and approximately 133,400 hourly employees. On a comparable basis, as of December 31, 2006, we employed approximately 171,400 people (34,600 in the U.S., and 136,800 outside of the U.S.): approximately 36,700 salaried employees and approximately 134,700 hourly employees. Our unionized employees are represented worldwide by approximately 50 unions, including the International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America (“UAW”), the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers-Communication Workers of America (“IUE-CWA”), the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union and its Local Union 87L (together, the “USW”), and Confederacion De Trabajadores Mexicanos (“CTM”). As of December 31, 2007 and 2006, approximately 14,200 and 18,300 hourly employees were represented by the UAW, approximately 2,000 and 1,900 by the IUE-CWA and approximately 500 and 1,100 by the USW and other unions, respectively.

 

In 2006, the Court entered orders authorizing Delphi to enter into an attrition program and supplemental attrition program with GM and the UAW (the “UAW Attrition Programs”), which offered, among other things, certain eligible Delphi U.S. hourly employees represented by the UAW normal and early voluntary retirements with a $35,000 lump sum incentive payment paid by Delphi and reimbursed by GM. The programs also provided a pre-retirement program under which employees with at least 26 and fewer than 30 years of credited service were granted the ability to cease working and to receive monthly payments and benefits until they accrue 30 years of credited service at which time they would be eligible to retire without additional incentives. The programs also provided buyout payments which, depending on the amount of seniority or credited service, ranged from $40,000 to $140,000. GM has agreed to reimburse Delphi for one-half of these buyout payments and in exchange will receive an allowed prepetition general unsecured claim. In addition, employees who elected to participate in the UAW Attrition Programs were eligible to retire as employees of Delphi or flow back to GM and retire. During 2006, approximately 10,000 employees elected to flow back to GM and retire. Although GM agreed to assume the postretirement healthcare and life insurance coverages for these retirees, due to the volume of retirements, GM was unable immediately to transition these retirees to GM healthcare and life insurance plans. Delphi agreed to administer health and life insurance coverage for these retirees during the transition period and GM agreed to reimburse Delphi for the actual costs of providing such coverage.

 

Also in 2006, Delphi, GM, and the IUE-CWA reached agreement on the terms of a special attrition program which mirrored in all material respects the UAW Attrition Programs. The lump sum incentive payments of $35,000 per eligible employee and one-half of the $40,000 to $140,000 buyout payments are being paid by Delphi and reimbursed by GM. GM will receive an allowed prepetition general unsecured claim equal to the amount it reimburses Delphi for the buyout payments. The IUE-CWA special attrition program (the “IUE-CWA Special Attrition Program”) was approved by the Court by order entered on July 7, 2006.

 

Wilmington Trust Company (“Wilmington Trust”), as indenture trustee to the Debtors’ senior notes and debentures, filed a notice of appeal from the Court’s order approving the UAW Special Attrition Program. On July 17, 2006, Wilmington Trust filed a notice of appeal from the order approving the UAW Supplemental

Agreement and the IUE-CWA Special Attrition Program. The appeals have been placed in suspense and resolution is not expected to have a material impact on Delphi’s financial condition or results of operations.

 

On March 31, 2006, the Debtors filed a motion with the Court under sections 1113 and 1114 of the Bankruptcy Code seeking authority to reject U.S. labor agreements and to modify retiree benefits. A hearing on the section 1113 and 1114 motion commenced in May 2006 and continued into June, and thereafter was adjourned on several occasions. In June, July and August 2007, Delphi signed agreements with its principal U.S. labor unions which settled the Debtors’ motion under sections 1113 and 1114 of the Bankruptcy Code. Among other things, as approved and confirmed by the Court, this series of settlement agreements or memoranda of understanding among Delphi, its unions, and GM modify, extend or terminate provisions of the existing collective bargaining agreements among Delphi and its unions, covering a four-year term with each union. The UAW settlement agreement includes extending, until March 31, 2008, our obligation to indemnify GM if certain GM-UAW benefit guarantees are triggered. The U.S. labor settlement agreements include workforce transition programs which provide eligible employees with transformation plan options which, depending on the particular agreement, included (1) attrition options similar to the previously-approved attrition programs, (2) flowback rights to eligible Delphi employees who do not elect the attrition options, (3) provision of lump sum buy-down payments for traditional eligible employees who do not elect to leave Delphi, and (4) severance payments and supplemental unemployment benefits to eligible employees who are permanently laid off prior to September 14, 2011. During 2007, approximately 1,300 employees eligible to participate in the attrition programs encompassed in the workforce transition programs elected to leave Delphi. Refer to Note 15. U.S. Employee Workforce Transition Programs to the consolidated financial statements for more information.

 

Products and Competition

 

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, application of lean principles, operational flexibility, customer service and overall management. In addition, our customers generally require that we demonstrate improved efficiencies, through cost reductions and/or price improvement, on a year-over-year basis.

 

Delphi’s critical success factors for original equipment manufacturers include:

 

 

Core Product Portfolio. Delphi focused its product portfolio on those core technologies for which we believe we have significant competitive and technological advantages. Delphi will concentrate the organization around the following core strategic product lines:

 

 

 

Delphi’s organizational structure and management reporting support the management of these core product lines. Our current product offerings are organized in the following five operating segments: Electronics and Safety, Powertrain Systems, Electrical/Electronic Architecture, Thermal Systems, as well as the Automotive Holdings Group. Our operating segment product offerings and principal competitors as of December 31, 2007 are described below. Refer to Note 21. Segment Reporting to the consolidated financial statements and Management’s Discussion and Analysis and Results of Operations in this Annual Report for additional financial information regarding each operating sector. In addition to these five operating segments, we have product sales in the automotive aftermarket, consumer electronics and the medical device industry which are reported in the Corporate and Other segment and we have steering and halfshaft product sales and interiors and closures product sales which are reported in discontinued operations.

 

Below is a summary of financial information related to each of our segments followed by a description of our segment product offerings and principal competitors.

 

 

 

 

Refer to Note 21. Segment Reporting for discussion on significant items included in the segment operating income.

 

Continuing Operations

 

Electronics and Safety. This segment offers a wide range of electronic and safety equipment in the areas of controls, security, entertainment, communications, safety systems and power electronics.

 

 

Principal competitors in the Electronics and Safety segment include Continental AG, Denso Corporation, Valeo Inc., Bosch Group, Autoliv Inc. and TRW Automotive.

 

Powertrain Systems. This segment offers high quality products for complete engine management systems (“EMS”) to help optimize performance, emissions and fuel economy.

 

 

Principal competitors in the Powertrain Systems segment include Bosch Group, Denso Corporation, Magneti Marelli Powertrain USA, Inc. and Continental AG.

 

Electrical/Electronic Architecture. This segment offers complete Electrical/Electronic Architectures for our customer-specific needs that help reduce production cost, weight and mass, and improve reliability and ease of assembly.

 

 

Principal competitors in the Electrical/Electronic Architecture segment include Yazaki Corporation, Sumitomo, Lear Corporation, Molex Inc. and Tyco International.

 

Thermal Systems. This segment offers energy efficient thermal system and component solutions for the automotive market and continues to develop applications for the non-automotive market. Delphi’s Automotive Thermal Products are designed to meet customers’ needs for powertrain thermal management and cabin thermal comfort (climate control).

 

 

Principal competitors in the thermal automotive segment include Behr GmbH & Co. KG, Denso Corporation, Valeo Inc. and Visteon Corporation.

 

Automotive Holdings Group. This segment is comprised of select plant sites and non-core product lines that we will seek to sell or wind-down.

 

 

Sales are predominantly to GM or Tier 1 suppliers that ultimately sell our products to GM.

 

Discontinued Operations

 

Steering Business. The halfshaft and steering system products are reported in discontinued operations.

 

Principal competitors in halfshaft products include GKN Driveline and NTN Corporation. Principal competitors in steering systems include JTEKT Corporation, ZF Friedrichshafen AG, TRW Automotive, NSK Corporation, ThyssenKrupp Presta, and Mando Corporation.

 

Interiors and Closures Business. The cockpit and interiors and integrated closures products are reported in discontinued operations. The interiors and closures business offers interiors and closure system products that address customers styling, quality and performance requirements.

 

 

Principal competitors in interior systems include JCI, IAC, Magna, Draxlmaier and Faurecia. Principal competitors in closure systems include Magna, Keikert, Brose and Valeo.

 

Customers

 

We primarily sell our products and services to the major global vehicle manufacturers (“VMs”). GM sales include GM and its consolidated subsidiaries. Sales to GM’s non-consolidated subsidiaries (such as Shanghai GM) and sales to other Tier 1 suppliers that sell directly to GM is classified as sales to other customers. As a percentage of sales from continuing operations, our sales to customers other than GM were 63% in 2007. Our business with customers other than GM has increased since the Separation. While we expect our non-GM business to continue to increase, we anticipate that GM will remain our largest customer for a period of time due to forward commitments to supply relationships and our historic relationship with GM. Our sales to GM continue to decline, principally due to the elimination of non-core businesses and, to a lesser degree, declining GM production, the impact of customer driven price reductions, as well as GM’s diversification of its supply base and ongoing changes in our vehicle content and the product mix supplied. Delphi currently supplies parts to VMs in every region globally. We also sell our products to the worldwide aftermarket for replacement parts, including the aftermarket operations of our VM customers and to other distributors and retailers (“Independent Aftermarket”). While we intend to continue to focus on retaining and winning GM’s business in each of our core strategic product lines, we cannot provide assurance that we will succeed in doing so. Additionally, our revenues may be affected by changes in GM’s business or market share and that impact will likely vary by region.

 

The following table shows our total net sales for continuing operations for each of the last three years:

 

 

Included in sales to other customers in the foregoing table are sales to all customers other than GM and its consolidated subsidiaries, including sales to other major global VMs and sales to Tier 1 suppliers who

ultimately sell to GM. Sales to four of these other major global VMs exceeded $750 million in 2007 including Ford Motor Company, Chrysler Corporation, Volkswagen Group and Renault/Nissan Motor Company, Ltd. Also included in sales to other customers are sales to independent aftermarket customers, consumer electronics customers, manufacturers of medium-duty and heavy-duty trucks, off-road equipment and other new customers beyond our traditional automotive customer base.

 

Sales Backlog

 

We receive VM purchase orders for specific components supplied for particular vehicles. These supply relationships typically extend over the life of the related vehicle, and do not require the customer to purchase a minimum quantity. Customers can impose competitive pricing provisions on those purchase orders each year, potentially reducing our profit margins or increasing the risk of our losing future sales under those purchase orders. Additionally, our largest customer, GM, reserves a right to terminate for convenience on certain of our long-term supply contracts (see “Arrangements Between Delphi and GM, VM Supply Arrangements” below). Termination for convenience means GM can terminate the contract at any time for any reason. We manufacture and ship based on customer release schedules, normally provided on a weekly basis, which can vary due to cyclical automobile production or dealer inventory levels.

 

Although customer programs typically extend to future periods, and although there is an expectation that we will supply certain levels of VM production over such periods, we believe that outstanding purchase orders and product line arrangements do not constitute firm orders. Firm orders are limited to specific and authorized customer purchase order releases placed with our manufacturing and distribution centers for actual production and order fulfillment. Firm orders are typically fulfilled as promptly as possible after receipt from the conversion of available raw materials and work-in-process inventory for VM orders and from current on-hand finished goods inventory for aftermarket orders. The dollar amount of such purchase order releases on hand and not processed at any point in time is not believed to be significant based upon the timeframe involved. Accordingly, even though we have purchase orders covering multiple model years, they do not require the customer to purchase a minimum quantity.

 

The composition of our purchase orders and arrangements as measured by terms and conditions, pricing, and other factors has remained largely consistent.

 

Delphi’s Global Operations

 

Information concerning principal geographic areas for continuing operations is set forth below. Net sales data reflects the manufacturing location for the years ended December 31. Net property data is as of December 31.

 

 

Variability in Delphi’s Business

 

The majority of our business is related to automotive sales, which vary directly with the production schedules of our VM customers. The market for vehicles is cyclical and dependent on general economic conditions, consumer spending and buying preferences. The rate at which our customers build vehicles depends on their market performance as well as company specific inventory and incentive strategies. Any

significant reduction or increase in automotive production by our customers has a material effect on our business.

 

We have substantial operations in major regions of the world and economic conditions in these regions often differ, which may have varying effects on our business. Our business is moderately seasonal, as our primary North American customers historically halt operations for approximately two weeks in July and approximately one week in December. Our European customers generally reduce production during the months of July and August and for one week in December. Accordingly, our results reflect this seasonality.

 

Environmental Compliance

 

We are subject to the requirements of U.S. federal, state, local and non-U.S. environmental and occupational safety and health laws and regulations. These include laws regulating air emissions, water discharge and waste management. We have an environmental management structure designed to facilitate and support our compliance with these requirements globally. Although it is our intent to comply with all such requirements and regulations, we cannot provide assurance that we are at all times in compliance. We have made and will continue to make capital and other expenditures to comply with environmental requirements. Although such expenditures were not material during the past three years, Delphi expects to spend $11 million over the course of the next year to install pollution control equipment on coal-fired boilers at its Saginaw, Michigan Steering Division facility to meet U.S. and State of Michigan air emission regulations. Environmental requirements are complex, change frequently and have tended to become more stringent over time. Accordingly, we cannot assure that environmental requirements will not change or become more stringent over time or that our eventual environmental remediation costs and liabilities will not be material.

 

Delphi is also subject to complex laws governing the protection of the environment and requiring investigation and remediation of environmental contamination. Delphi is in various stages of investigation and remediation at its manufacturing sites where contamination has been discovered. Additionally, Delphi received notices that it is a potentially responsible party (“PRP”) in proceedings at various sites, including the Tremont City Landfill Site (the “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 U.S. Environmental Protection Agency (“EPA”) to perform a Remedial Investigation and Feasibility Study concerning a portion of the Site. The Remedial Investigation and Alternatives Array Document were finalized in 2007. A Feasibility Study and Record of Decision are expected to be completed in 2008. Although Delphi believes that capping and future monitoring is a reasonably possible outcome, a different cleanup approach ultimately may be required for the Site. Because the manner of remediation is yet to be determined, it is possible that the resolution of this matter may require Delphi to make material future expenditures for remediation, possibly over an extended period of time and possibly in excess of existing reserves. As of December 31, 2007, Delphi has recorded its best estimate of its share of the remediation based on the remedy described above. However, if that remedy is not accepted, Delphi’s expenditures for remediation could increase by $20 million in excess of its existing reserves. Delphi will continue to re-assess any potential remediation costs and, as appropriate, its environmental reserve as the investigation proceeds.

 

As of December 31, 2007 and 2006, our reserve for environmental investigation and remediation was approximately $112 million and $118 million, respectively, including approximately $3 million within liabilities subject to compromise at December 31, 2006. The amounts recorded take into account the fact that GM retained the environmental liability for certain inactive sites as part of the Separation. Delphi completed a number of environmental investigations during 2006 in conjunction with our transformation plan, which contemplates significant restructuring activity, including the sale or closure of numerous facilities. As part of developing and evaluating various restructuring alternatives, environmental assessments that included identification of areas of interest, soil and groundwater testing, risk assessment and identification of remediation issues were performed at nearly all major U.S. facilities. These assessments identified previously unknown conditions and led to new information that allowed us to further update our reasonable estimate of required remediation for previously identified conditions requiring an adjustment to our environmental reserve of approximately $70 million in 2006. The additional reserves are primarily related to 35 facilities and are comprised of investigation, remediation and operation and maintenance of the remedy, including

postremediation monitoring costs. Addressing contamination at these sites is required by the Resource Conservation & Recovery Act and various other federal, state or local laws and regulations and represent management’s best estimate of the cost to complete such actions. Management believes that its December 31, 2007 accruals will be adequate to cover the estimated liability for its exposure with respect to such matters and that these costs will be incurred over the next 20 years. However, as we continue the ongoing assessment with respect to such facilities, additional and perhaps material environmental remediation costs may require recognition, as previously unknown conditions may be identified. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental remediation costs and liabilities will not exceed the amount of our current reserves. In the event that such liabilities were to significantly exceed the amounts recorded, Delphi’s results of operations could be materially affected.

 

Delphi estimates environmental remediation liabilities based on the most probable method of remediation, current laws and regulations and existing technology. Estimates are made on an undiscounted basis and exclude the effects of inflation. If there is a range of equally probable remediation methods or outcomes, Delphi accrues at the lower end of the range. At December 31, 2007, the difference between the recorded liabilities and the reasonably possible maximum estimate for these liabilities was approximately $105 million.

 

Other

 

As mentioned above, Delphi continues to pursue its transformation plan, which contemplates significant restructuring activity, including the sale, closure or demolition of numerous facilities. As such, Delphi continues to conduct additional assessments as the Company evaluates whether to permanently close or demolish one or more facilities as part of its restructuring activity. These assessments could result in Delphi being required to incur additional and possibly material costs or demolition obligations in the future. In 2007, Delphi commissioned building demolition assessments for certain sites that may ultimately be demolished or sold in the next few years. These assessments provided detailed estimates of quantities of asbestos at these particular sites and detailed cost estimates for remediation of that asbestos, which resulted in a $14 million revision to the existing estimates increasing the related asset retirement obligations.

 

Arrangements Between Delphi and GM

 

The Separation of Delphi from GM was effective January 1, 1999, at which time 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 agreed to indemnify GM against substantially all losses, claims, damages, liabilities or activities arising out of or in connection with our business post-Separation. The UAW settlement agreement includes extending, until March 31, 2008, our obligation to indemnify GM if certain GM-UAW benefit guarantees are triggered. In addition, we 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. GM in turn agreed that it would not unreasonably withhold its consent to assignment of existing contracts with GM relating to the business being sold to a qualified buyer.

 

During 2007, Delphi and GM entered into comprehensive settlement agreements consisting of a Global Settlement Agreement (“GSA”) and Master Restructuring Agreement (“MRA”). The GSA and MRA, which comprise a part of the Amended Plan, were approved in the order confirming the Amended Plan entered on January 25, 2008. Together, these agreements provide for a comprehensive settlement of all outstanding issues between Delphi and GM, including issues arising out of or related to the Separation. For more information regarding these matters, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Plan of Reorganization and Transformation Plan, GM in this Annual Report.

 

Product Portfolio. As part of its transformation plan, Delphi identified non-core product lines that do not fit into Delphi’s future strategic framework, which we are seeking to sell or wind-down. Any sale or wind-down process, however, is being conducted in consultation with the Company’s customers, unions and other

stakeholders to carefully manage the transition of affected product lines. Generally we are seeking GM’s support with respect to any sale of product lines which could impact their business, including seeking their support (and consent, where required) to assign GM contracts. Our ability to obtain or require GM’s consent to an assignment of its existing agreements to a prospective buyer of a product line will also be impacted by the extent to which we exercise our rights to reject, or assign and assume, contracts under the Bankruptcy Code. In addition, during 2007 Delphi and GM entered into comprehensive settlement agreements. For more information regarding these matters, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Plan of Reorganization and Transformation Plan, GM in this Annual Report.

 

VM Supply Agreements. GM continues to be our largest customer and, to compete effectively, we will need to continue to satisfy GM’s pricing, service, technology and increasingly stringent quality and reliability requirements, which, because we are GM’s largest supplier, particularly affect us.

 

Our business with GM and with other VMs is governed by supply contracts. Consistent with GM’s contracts with other suppliers, on a case by case basis, GM may terminate a supply contract with Delphi and “re-source” the business to another supplier for a variety of factors, such as our non-competitiveness (including, in many cases, price as well as quality, service, design, and technology), cause, expiration, and termination for convenience. Termination for convenience means GM can terminate the contract at any time for any reason. Although GM reserves a right to terminate for convenience under its standard terms and conditions, GM’s standard long term contracts limit GM’s termination for convenience rights and its rights to re-source for non-competitiveness. Our supply contracts with GM are generally either annual purchase orders, under which GM retains a right to terminate for convenience, or long-term contracts. Prior to October 1, 2003, GM’s standard long term contract provided that GM would not exercise a right to terminate for convenience or require that we be competitive in terms of pricing during the first 18 months of the contract. GM’s current standard long term contract provides that GM will not exercise its right to terminate for convenience except in the case of cancellation or modification of the related vehicle program, provided that GM may “re-source” for non-competitive pricing, technology, design or quality at any time during the contract period, subject to the requirement of notice and an opportunity for us to become competitive. In addition, our supply contracts with GM generally give GM the right to terminate in the event of a change in control of Delphi. Unilateral termination by GM of a majority of its supply contracts with us would have a material adverse effect on our business.

 

Our supply contracts also cover service parts we provide to GM for sale to GM-authorized dealers worldwide. Generally, similar to supply contracts with many other North American VMs, the unit pricing on service parts that are not “past model” will continue at the prices charged to GM in a range of three to five years after such service parts go “past model.” The term “past model” refers to parts for vehicles that are no longer in production. Thereafter, unit prices for such service parts will be negotiated between the parties. The terms and pricing of other value-added services, such as special packaging and shipping agreements and other aftermarket products, are negotiated separately and captured in the supply contracts.

 

On March 31, 2006, the Debtors filed a motion with the Court seeking authority to reject certain customer contracts with GM under section 365 of the Bankruptcy Code. The initial GM contract rejection motion covered approximately half of the North American annual purchase volume revenue from GM. The hearing on the motion was scheduled to commence on September 28, 2006, but was adjourned on several occasions with periodic chambers conferences being conducted in the interim to provide the Court with updates regarding the status of negotiations to consensually resolve the motion. On March 31, 2006, the Company also delivered a letter to GM initiating a process to reset the terms and conditions of more than 400 commercial agreements that expired between October 1, 2005 and March 31, 2006. The issues that gave rise to the GM contract rejection motion were resolved under the terms of the GSA and the MRA. Pursuant to the GSA, Delphi filed a stipulated order withdrawing the GM contract rejection motion, which was entered by the Court on January 7, 2008.

 

Employee Matters. As part of the Separation, we entered into several agreements with GM to allocate responsibility and liability for certain employee related matters. In connection with our Separation from GM,

GM granted the UAW-, IUE-CWA- and USW-represented employees guarantees covering benefits to be provided to certain former U.S. hourly employees who became our employees. We have entered into an agreement with GM that requires us to indemnify GM if GM is called to perform under the GM-UAW guarantee, which indemnification obligations remained in effect until October 18, 2007. During the second quarter of 2007, Delphi signed an agreement with the UAW, and during the third quarter of 2007, Delphi signed agreements with the remainder of its principal U.S. labor unions, which were ratified by the respective unions and approved by the Court in the third quarter of 2007. Among other things, this series of settlement agreements or memoranda of understanding among Delphi, its unions, and GM modify, extend or terminate provisions of the existing collective bargaining agreements among Delphi and its unions and cover issues such as site plans, workforce transition and legacy pension and other postretirement benefits obligations as well as other comprehensive transformational issues. The UAW settlement agreement includes extending, until March 31, 2008, our obligation to indemnify GM if certain GM-UAW benefit guarantees are triggered. Portions of these agreements have already become effective, while other portions will not become effective until the GSA and MRA, which resolve certain financial, commercial and other matters between Delphi and GM, become effective upon consummation of the Amended Plan as confirmed by the Court which incorporates, approves and is consistent with the terms of each agreement.

 

Flowback Rights. Upon our separation from GM, certain of our hourly UAW-represented employees in the U.S. are provided with opportunities to transfer to GM as appropriate job openings become available at GM and GM employees in the U.S. had similar opportunities to transfer to Delphi. The flow of GM employees to Delphi is eliminated under the UAW settlement agreement. 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 was no transfer of pension assets or liabilities between GM and Delphi with respect to such employees that transfer between our companies, however, pursuant to the GSA, Delphi will transfer certain assets and liabilities of its Delphi Hourly-Rate Employees Pension Plan to the GM Hourly-Rate Employee Pension Plan, as set forth in the union settlement agreements. The employee will receive pension benefits from both the GM and Delphi pension plans based on the pro-rata years of service with each company. GM will be responsible for OPEB obligations for employees that flow to GM, and that GM will receive a cash settlement from Delphi. An agreement with GM provides for a mechanism for determining a cash settlement amount for OPEB obligations (also calculated on a pro-rata basis) associated with employees who transfer between our Company and GM. Cash settlement occurs in the year the employee is actuarially determined to retire. Cash settlement has not occurred between GM and Delphi since Delphi filed for bankruptcy. For more information regarding these matters, refer to Item 7. Management’s Discussion and Analysis and Results of Operations — Plan of Reorganization and Transformation Plan, Labor in this Annual report.

 

Set forth below are certain risks and uncertainties that could adversely affect our results of operations or financial condition and cause our actual results to differ materially from those expressed in forward-looking statements made by the Company. Also refer to the Statement Regarding Forward-Looking Statements in this Annual Report.

 

Risk Factors Specifically Related to our Current Reorganization Cases Under Chapter 11 of the U.S. Bankruptcy Code

 

If We Are Unable To Successfully Reorganize Our Capital Structure And Operations And Implement Our Transformation Plan Through the Chapter 11 Process, The Debtors May Be Required To Liquidate Their Assets.

 

Commencing October 8, 2005, and October 14, 2005, the Company and certain of our U.S. subsidiaries filed voluntary petitions for reorganization relief under chapter 11 of the Bankruptcy Code. At that time, risks that the Company faced related to the Chapter 11 Filings included, but were not limited to, the following:

 

 

 

 

 

Our Amended Plan was confirmed by the Court on January 25, 2008. The risks that the Company now faces are that the Amended Plan might not be consummated, the transactions contemplated by the EPCA might not be consummated and GM might be unable or unwilling to fulfill its obligations to the Company as set forth in the MRA, GSA, and as comprehended in the UAW, IUE-CWA and USW settlement agreements. Moreover, if the Amended Plan cannot be consummated, the risks that the Company faced upon the commencement of its reorganization cases, as described above, will likely continue to exist.

 

Even assuming a successful emergence from chapter 11, there can be no assurance as to the overall long-term viability of our operational reorganization, including our ability to generate sufficient cash to support our operating needs, fulfill our transformation objectives and fund continued investment in technology and product development without incurring substantial indebtedness that will hinder our ability to compete, adapt to market changes and grow our business in the future.

 

In addition, the uncertainty regarding the eventual outcome of our transformation plan, and the effect of other unknown adverse factors, could threaten our existence as a going concern. Continuing on a going-concern basis is dependent upon, among other things, implementation of the Amended Plan and the transactions contemplated thereby, maintaining the support of key vendors and customers, and retaining key personnel, along with financial, business, and other factors, many of which are beyond our control. Our independent registered public accounting firm has included a going-concern explanatory paragraph in its report on our consolidated financial statements.

 

Under the absolute priority rules established by the Bankruptcy Code, unless creditors agree otherwise, prepetition liabilities and postpetition liabilities accrued during the pendency of the chapter 11 cases must be satisfied in full before shareholders may be entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or shareholders is set forth in the Amended Plan as described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Transformation Plan. Even though the Amended Plan has been confirmed, there can be no assurances that we will be able to satisfy the conditions to effectiveness set forth in the Amended Plan or that it will become effective on the terms described herein or at all. If the Amended Plan does not become effective as described herein, no assurance can be given as to what values, if any, will be ascribed in the chapter 11 cases to each of these constituencies or what types or amounts of distributions, if any, they would receive. If the Company is unable to consummate the transactions set forth in the Amended Plan and EPCA its common stock may ultimately be determined to have no value. Accordingly, the Company urges that appropriate caution be exercised with respect to existing and future investments in its common stock or other equity securities, or any claims relating to prepetition liabilities.

 

Our Ability To Utilize Our Net Operating Loss Carryforwards And Other Tax Attributes Will Be Limited.

 

We have significant net operating loss carryforwards (“NOLs”) and other U.S. federal income tax attributes. Section 382 of the Internal Revenue Code of 1986, as amended, limits a corporation’s ability to

utilize NOLs and other tax attributes following a Section 382 ownership change. We expect that we will undergo a Section 382 ownership change upon the implementation of the Amended Plan and, consequently, our ability to utilize our NOLs and other tax attributes will be limited. In this regard, it should be noted that we have previously recorded a full valuation allowance against our U.S. deferred tax assets with respect to these tax attributes. Certain special rules applicable to ownership changes that occur in bankruptcy may be available, however, to limit the consequences of such an ownership change. If we were to undergo a Section 382 ownership change prior to or after implementation of the Amended Plan, our NOLs and other tax attributes may be limited to a greater extent or in some cases eliminated. While we believe that we have not undergone any Section 382 ownership change to date, we cannot give you any assurance that we will not undergo a Section 382 ownership change prior to or after implementation of the Amended Plan.

 

We May Not Be Able To Obtain Sufficient Exit Financing To Support Our Amended Plan.

 

As discussed above, effectiveness of our plan of reorganization and consummation of the transactions contemplated by the EPCA are subject to a number of conditions, including obtaining exit financing. It is expected that on the effective date of the Amended Plan our debtor-in-possession financing will be replaced with approximately $6.1 billion of new exit financing, which we anticipate will consist of first lien financing of $3.7 billion, second lien financing of $825 million, and an asset based revolving credit facility of $1.6 billion, substantially all of which is expected to be undrawn at emergence from chapter 11. There can be no assurances that such exit financing can be obtained. The EPCA further provides the Investors certain rights to review the terms of the exit financing we obtain in light of the financing and other related conditions and covenants of the EPCA, including a limitation that the Company’s pro forma interest expense during 2008 with respect to the Company’s total indebtedness, as defined in the EPCA, will not exceed $585 million. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Plan of Reorganization and Transformation Plan, Equity Purchase and Commitment Agreement for more information.

 

Business Environment and Economic Conditions

 

The Cyclical Nature Of Automotive Sales And Production Can Adversely Affect Our Business.

 

Our business is directly related to automotive sales and automotive vehicle production by our customers. Automotive sales and production are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences as well as changes in interest rate levels, consumer confidence and fuel costs. In addition, automotive sales and production can be affected by labor relations issues, regulatory requirements, trade agreements and other factors. Any significant economic decline that results in a reduction in automotive sales and production by our customers will have a material adverse effect on our business, results of operations and financial condition.

 

Our sales are also affected by inventory levels and VMs production levels. We cannot predict when VMs will decide to either build or reduce inventory levels or whether new inventory levels will approximate historical inventory levels. This may result in variability in our sales and financial condition. Uncertainty regarding inventory levels may be exacerbated by favorable consumer financing programs initiated by VMs which may accelerate sales that otherwise would occur in future periods. We also have historically experienced sales declines during the VMs scheduled shut-downs or shut-downs resulting from unforeseen events. Continued uncertainty and other unexpected fluctuations could have a material adverse effect on our business and financial condition.

 

Drop In The Market Share And Changes In Product Mix Offered By Our Customers Can Impact Our Revenues.

 

The mix of vehicle offerings by our VM customers also impacts our sales. A decrease in consumer demand for specific types of vehicles where Delphi has traditionally provided significant content could have a significant effect on our business and financial condition. Our sales of products in adjacent markets to our customers also depend on the success of these customers retaining their market share. In addition, we may not be able to adapt our product offerings to meet changing consumer preferences and our customers’ supply

requirements on a timely, cost effective basis. The ability to respond to competitive pressures and react quickly to other major changes in the marketplace including in the case of automotive sales, increased gasoline prices or consumer desire for and availability of vehicles using alternative fuels is also a risk to our future financial performance.

 

We Depend On General Motors Corporation As A Customer, And We May Not Be Successful At Attracting New Customers.

 

GM is our largest customer and accounted for 37% of our total net sales from continuing operations in 2007, and a portion of our non-GM sales are to Tier 1 suppliers who ultimately sell our products to GM. In addition, GM accounts for an even greater percentage of our net sales in North America where we have limited ability to adjust our cost structure to changing economic and industry conditions and where we are faced with high wage and benefit costs. Additionally, our revenues may be affected by decreases in GM’s business or market share. GM has reported a variety of challenges it is facing, including with respect to its debt ratings, its relationships with its unions and large shareholders and its cost and pricing structures. If GM is unable or unwilling to engage in a business relationship with us on a basis that involves improved terms for Delphi, as set forth in the comprehensive settlement agreements, the MRA and GSA that have been agreed to as part of our Amended Plan (as compared to those currently in place), we believe that the Company’s sales, cost structure and profitability will be adversely affected. For these reasons, we cannot provide any assurance as to the amount of our future business with GM. To the extent that we do not maintain our existing level of business with GM, we will need to attract new customers or our results of operations and financial condition will be adversely affected. There can be no assurance that we will be successful in expanding our existing customer base.

 

We Have Invested Substantial Resources In Markets Where We Expect Growth And We May Be Unable To Timely Alter Our Strategies Should Such Expectations Not Be Realized.

 

Our future growth is dependent on us making the right investments at the right time to support product development and manufacturing capacity in areas where we can support our customer base. We have identified the Asia Pacific region, China and India in particular, as key markets and ones likely to experience substantial growth, and accordingly have made substantial investments, both directly and through participation in various partnerships and joint ventures, including numerous manufacturing operations, technical centers and other infrastructure to support anticipated growth in the region. If we are unable to deepen existing and develop additional customer relationships in this region, we may not only fail to realize expected rates of return on our existing investments, but we may incur losses on such investments and be unable to timely redeploy the invested capital to take advantage of other markets, potentially resulting in lost market share to our competitors.

 

Continued Pricing Pressures, VM Cost Reduction Initiatives And Ability Of VMs To Resource Or Cancel Vehicle Programs May Result In Lower Than Anticipated Margins, Or Losses, Which May Have A Significant Negative Impact On Our Business.

 

Cost-cutting initiatives adopted by our customers result in increased downward pressure on pricing. Our customer supply agreements generally require step-downs in component pricing over the period of production, typically two to three percent per year. VMs historically have had significant leverage over their outside suppliers because the automotive component supply industry is fragmented and serves a limited number of automotive VMs, and, as such, Tier 1 suppliers are subject to substantial continuing pressure from VMs to reduce the price of their products. It is possible that pricing pressures beyond our expectations could intensify as VMs pursue restructuring and cost cutting initiatives. If we are unable to generate sufficient production cost savings in the future to offset price reductions, our gross margin and profitability would be adversely affected.

 

Furthermore, in most instances our VM customers are not required to purchase any minimum amount of products from us. The contracts we have entered into with most of our customers provide for supplying the customers for a particular vehicle model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model (usually three to seven years), typically are non-

exclusive or permit the VM to resource if we do not remain competitive and achieve and pass through cost savings in the form of lower prices over the life of the contract, and do not require the purchase by the customer of any minimum number of parts from us. Pricing and capital investment decisions are made by us at the time the contract is entered into based on projected volumes. Therefore, a significant decrease in demand for certain key models or group of related models sold by any of our major customers or the ability of a manufacturer to resource and discontinue purchasing from us, for a particular model or group of models, could have a material adverse effect on us.

 

We Operate In The Highly Competitive Automotive Supply Industry.

 

The automotive component supply industry is highly competitive, both domestically and internationally. Competition is based primarily on price, technology, quality, delivery and overall customer service. Many of our competitors operate with lower overall and/or more flexible cost structures than we do. In particular, we face restrictions in our ability to adjust our cost structure to reduced VM production volumes or demand for our products. This in turn may limit our ability to redeploy resources toward research and development of new technology or to quickly respond to changing market demand or consumer preferences. There can be no assurance that our products will be able to compete successfully with the products of our competitors. Furthermore, the rapidly evolving nature of the markets in which we compete may attract new entrants, particularly in low cost countries. As a result, our sales levels and margins could be adversely affected by pricing pressures caused by such new entrants. These factors led to selective resourcing of future business to non-U.S. competitors in the past and may continue to do so in the future. In addition, any of our competitors may foresee the course of market development more accurately than us, develop products that are superior to our products, have the ability to produce similar products at a lower cost than us, or adapt more quickly than us to new technologies or evolving customer requirements. As a result, our products may not be able to compete successfully with their products.

 

Certain Disruptions In Supply Of And Changes In the Competitive Environment For Raw Materials Integral To Our Products May Adversely Affect Our Profitability.

 

We use a broad range of materials and supplies, including metals, castings, chemicals and electronic components in our products. A significant disruption in the supply of these materials could decrease production and shipping levels, materially increase our operating costs and materially adversely affect our profit margins. Shortages of materials or interruptions in transportation systems, labor strikes, work stoppages, or other interruptions to or difficulties in the employment of labor or transportation in the markets where our company purchases material, components and supplies for the production of our products or where our products are produced, distributed or sold, whether as a result of labor strife, war, further acts of terrorism or otherwise, in each case may adversely affect our profitability. Significant changes in the competitive environment in the markets where our company purchases material, components and supplies for the production of our products or where our products are produced, distributed or sold also may adversely affect our profitability. In addition, our profitability may be adversely affected by changes in economic conditions or political stability in the markets where our company procures material, components, and supplies for the production of our principal products or where our products are produced, distributed, or sold (e.g., North America, Europe, South America and Asia Pacific).

 

In recent periods there have been significant increases in the global prices of aluminum, copper, resins and steel, which have had and may continue to have an unfavorable impact on our business. We anticipate that these increases will continue to adversely affect our business throughout fiscal 2008. Any continued fluctuations in the price or availability of steel, resins or copper may have a material adverse effect on our business, results of operations or financial condition. As the resin raw material market related cost pressure continues, we expect to see increasing costs in our resin as well as our plastic component supplier value streams. We will continue efforts to pass some of the supply and raw material cost increases onto our customers, although competitive and marketing pressures have limited our ability to do that, particularly with domestic VMs, and may prevent us from doing so in the future and in some cases there is a lapse of time before we are able to pass price increases through to the customer. In addition, our customers are generally not

obligated to accept price increases that we may desire to pass along to them. This inability to pass on price increases to our customers when raw material prices increase rapidly or to significantly higher than historic levels could adversely affect our operating margins and cash flow, possibly resulting in lower operating income and profitability.

 

We also face an inherent business risk of exposure to commodity prices risks, and have historically offset a portion of our exposure, particularly to changes in the price of various non-ferrous metals used in our manufacturing operations, through commodity swaps and option contracts. We expect to be continually challenged as demand for our principal raw materials will be significantly impacted by demand in emerging markets, particularly in China and India. We cannot provide assurance that fluctuations in commodity prices will not otherwise have a material adverse effect on our financial condition or results of operations, or cause significant fluctuations in quarterly and annual results of operations.

 

We May Not Be Able To Respond Quickly Enough To Changes In Technology And Technological Risks, And To Develop Our Intellectual Property Into Commercially Viable Products.

 

Changes in legislative, regulatory or industry requirements or in competitive technologies may render certain of our products obsolete or less attractive. Our ability to anticipate changes in technology and regulatory standards and to successfully develop and introduce new and enhanced products on a timely basis will be a significant factor in our ability to remain competitive. We cannot provide assurance that we will be able to achieve the technological advances that may be necessary for us to remain competitive or that certain of our products will not become obsolete. We are also subject to the risks generally associated with new product introductions and applications, including lack of market acceptance, delays in product development and failure of products to operate properly.

 

To compete effectively in the automotive supply industry, we must be able to launch new products to meet our customers’ demand in a timely manner. We cannot provide assurance, however, that we will be able to install and certify the equipment needed to produce products for new product programs in time for the start of production, or that the transitioning of our manufacturing facilities and resources to full production under new product programs will not impact production rates or other operational efficiency measures at our facilities. In addition, we cannot provide assurance that our customers will execute on schedule the launch of their new product programs, for which we might supply products. Our failure to successfully launch new products, or a failure by our customers to successfully launch new programs, could adversely affect our results.

 

We May Not Succeed In Our Attempts To Improve Our Cost Structure.

 

We may have difficulty in generating cost savings and operational improvements in the future and in adapting our cost structure, adequately to adjust for significant changes in vehicle production rates, and to offset price reductions and increases in raw material or labor costs. Modifications made to our collective bargaining agreements together with the comprehensive settlement agreements negotiated with GM improve our cost structure and our ability to adjust for changes in economic conditions at our legacy sites, however we must continue our transformation plan to realign our footprint and emerge from chapter 11 for these arrangements to be fully effective. Our labor costs may include increased funding requirements for pensions or healthcare costs (some of which have been deferred during the chapter 11 cases). Certain commodity prices, particularly aluminum, copper, resins and steel, have markedly increased. Price reductions are often required pursuant to contracts or to remain competitive with our peers and are sometimes necessary to win additional business. In addition, our cost structure may be adversely affected by changes in the laws, regulations, policies or other activities of governments, agencies and similar organizations where such actions may affect the production, licensing, distribution or sale of our company’s products, the cost thereof or applicable tax rates, or affect the cost of legal and regulatory compliance or the cost of financing.

We May Suffer Future Asset Impairment And Other Restructuring Charges, Including Write Downs of Goodwill Or Intangible Assets.

 

From time to time in the past, we have recorded asset impairment losses and closure, severance and restructuring losses relating to specific plants and operations. Generally, we record asset impairment losses when we determine that our estimates of the future undiscounted cash flows from an operation will not be sufficient to recover the carrying value of that facility’s building, fixed assets and production tooling. During 2007, 2006 and 2005, we recorded substantial long-lived asset impairment losses. In light of the shifting nature of the competitive environment in which we operate, it is possible that we will incur similar losses and charges in the future, and those losses and charges may be significant.

 

We May Be Unable To Generate Sufficient Excess Cash Flow To Meet Increased U.S. Pension And OPEB Funding Obligations Upon Emergence.

 

We may require additional cash to meet increases in U.S. Pension and OPEB funding obligations resulting from market volatility that adversely affects our asset return expectations, a declining interest rate environment or other reasons. Delphi’s pension and OPEB obligations, including those covering U.S. hourly and salaried employees, exposed Delphi to approximately $12.5 billion and $13.9 billion in underfunded liabilities at December 31, 2007 and 2006, respectively, of which approximately $3.8 billion and $4.8 billion was attributable to underfunded pension obligations and $8.7 billion and $9.1 billion was attributable to OPEB obligations, respectively. However, through the chapter 11 process and favorable IRS pension waivers, Delphi is permitted to defer a significant portion of the pension contributions until it emerges from chapter 11. Additionally, as part of Delphi’s plan of reorganization and transformation plan, Delphi has reached agreements with GM and the unions representing its U.S. hourly employees to transfer to GM certain OPEB obligations at bankruptcy emergence. However, Delphi will be required to make up any deferred pension contributions at the time of its emergence from chapter 11. Delphi’s discussions with the Internal Revenue Service (“IRS”) and Pension Benefit Guaranty Corporation (“PBGC”) regarding the funding of certain of its pension obligations upon emergence from chapter 11 culminated in a funding plan that would enable us to satisfy our deferred pension funding obligations upon emergence from chapter 11 through a combination of cash contributions and a transfer of certain underfunded liabilities to a pension plan sponsored by GM. In addition, the IRS and PBGC agreed to certain conditional waivers that were necessary to make the transfer of certain underfunded liabilities to a pension plan sponsored by GM economically efficient, thereby effectively lowering the amount of cash contributions to be made after Delphi’s emergence from chapter 11. The conditional waivers also include a full settlement of potential excise tax claims for the funding deficiencies that accumulated throughout the chapter 11 process. The funding plan and waivers are conditioned upon Delphi emerging from chapter 11 by February 29, 2008, although Delphi is discussing a possible extension with the IRS and PBGC. If the Amended Plan, including the comprehensive settlement agreements reached with GM, do not become effective and the transactions contemplated thereby are not consummated such that we do not emerge from chapter 11 on or before the expiration of the conditional waivers, the PBGC may immediately draw down the $150 million letters of credit, the PBGC could initiate an involuntary plan termination, missed contributions would be due and the IRS could assess penalties on the missed contributions. Refer to Note 2. Transformation Plan and Chapter 11 Bankruptcy for further information on Delphi’s discussions with the Internal Revenue Service and the Pension Benefit Guaranty Corporation.

 

Employee Strikes and Labor Related Disruptions May Adversely Affect our Operations.

 

Our business is labor intensive and utilizes a large number of unionized employees with contracts that run through September and October 2011 for our two largest U.S. unions. Approximately ninety-seven percent of our U.S. hourly workforce is represented by our two largest principal unions, the UAW and the IUE-CWA. A strike or other form of significant work disruption by the unions would likely have an adverse effect on our ability to operate our business. Although we have reached agreements with each of our U.S. labor unions to settle our previously-filed motions under sections 1113 and 1114 of the Bankruptcy Code and to extend, with certain modifications, our collective bargaining agreements, our failure to consummate the Amended Plan and the transactions contemplated thereby may leave us with no choice but to reinitiate a process to reject our

collective bargaining agreements. Rejection of our labor contracts could lead such unions to call a strike or other form of significant work disruption. In addition, it is a condition to the Investors’ obligations under the EPCA that there shall have been no material strike, labor stoppage or slowdown involving certain labor unions, including the UAW, at either Delphi or GM or any of their respective subsidiaries after October 29, 2007. In addition, it is also a condition to the Investors’ obligations under the EPCA that since October 29, 2007 there shall have been no strike, labor stoppage or slow down involving certain labor unions at Ford Motor Company or Chrysler Group or any of their respective subsidiaries that would have a material impact on the Investors’ proposed investment in Delphi.

 

We May Lose or Fail To Attract and Retain Key Salaried Employees and Management Personnel.

 

An important aspect of our competitiveness is our ability to attract and retain key salaried employees and management personnel. Our ability to do so is influenced by a variety of factors, including the compensation we award, and could be adversely affected by our recent financial performance.

 

Our Substantial Global Operations Mean We Are Exposed To Foreign Currency Fluctuations That May Affect Our Financial Results.

 

We have currency exposures related to buying, selling and financing in currencies other than the local currencies in which we operate. Historically we have reduced our exposure through financial instruments that provide offsets or limits to our exposures, which are opposite to the underlying transactions. We cannot provide assurance that fluctuations in currency exposures will not otherwise have a material adverse effect on our financial condition or results of operations, or cause significant fluctuations in quarterly and annual results of operations.

 

We Face Risks Associated With Doing Business In non-U.S. Jurisdictions.

 

We have manufacturing and distribution facilities in many foreign countries, including countries in Asia, Eastern and Western Europe and South America. International operations are subject to certain risks inherent in doing business abroad, including:

 

 

Increasing our manufacturing footprint in Asian markets and our business relationships with Asian automotive manufacturers are important elements of our strategy. In addition, our strategy includes expanding our European market share and expanding our manufacturing footprint in lower-cost regions. As a result, our exposure to the risks described above may be greater in the future. The likelihood of such occurrences and their potential impact on us vary from country to country and are unpredictable.

 

Legal and Accounting Matters

 

We May Incur Material Losses And Costs As A Result Of Warranty Claims And Product Liability And Intellectual Property Infringement Actions That May Be Brought Against Us.

 

We face an inherent business risk of exposure to warranty claims and product liability in the event that our products fail to perform as expected and, in the case of product liability, such failure of our products results, or is alleged to result, in bodily injury and/or property damage. If any of our products are or are alleged to be defective, we may be required to participate in a recall involving such products. Each vehicle manufacturer has its own practices regarding product recalls and other product liability actions relating to its suppliers. However, as suppliers become more integrally involved in the vehicle design process and assume

more of the vehicle assembly functions, VMs are increasingly looking to their suppliers for contribution when faced with recalls and product liability claims. A recall claim brought against us, or a product liability claim brought against us in excess of our available insurance, may have a material adverse effect on our business. VMs are also increasingly requiring their suppliers to guarantee or warrant their products and bear the costs of repair and replacement of such products under new vehicle warranties. Depending on the terms under which we supply products to a vehicle manufacturer, a vehicle manufacturer may attempt to hold us responsible for some or all of the repair or replacement costs of defective products under new vehicle warranties, when the VM asserts that the product supplied did not perform as warranted. Although we cannot assure that the future costs of warranty claims by our customers will not be material, we believe our established reserves are adequate to cover potential warranty settlements. Our warranty reserves are based on our best estimates of amounts necessary to settle future and existing claims. We regularly evaluate the level of these reserves, and adjust them when appropriate. However, the final amounts determined to be due related to these matters could differ materially from our recorded estimates. Refer to Note 12. Warranty Obligations to the consolidated financial statements.

 

In addition, as we actively pursue additional technological innovation in both automotive and non-automotive industries and enhance the value of our intellectual property portfolio, we incur ongoing costs to secure, enforce and defend our intellectual property and face an inherent risk of exposure to the claims of other suppliers and parties that we have allegedly violated their intellectual property rights. We cannot assure that we will not experience any material warranty, product liability or intellectual property claim losses in the future or that we will not incur significant costs to defend such claims.

 

Incurrence Of Significant Legal Costs May Adversely Affect Our Profitability.

 

On October 30, 2006, the SEC commenced and simultaneously settled with Delphi a lawsuit alleging violations of federal securities laws, which concluded the SEC’s investigation of Delphi. Under the agreement approved by the SEC, Delphi agreed, without admitting or denying any wrongdoing, to be enjoined from future violations of the securities laws. Although the SEC did not impose civil monetary penalties against Delphi, we are subject to related private litigation involving the federal securities laws, the Employee Retirement Income Security Act (“ERISA”), and shareholder derivative actions. In August 2007, representatives of Delphi, Delphi’s insurance carriers, certain current and former directors and officers of Delphi, and certain other defendants involved in the proceedings were able to reach an agreement with the Lead Plaintiffs, as described in the sections below, which was approved by the Court on January 25, 2008. The settlement is contingent upon the effective date of the Amended Plan occurring, and if, for any reason, we cannot emerge as contemplated, the settlement will be null and void, and the actions could result in significant legal costs going forward. Refer to Note 17. Commitments and Contingencies, Shareholder Lawsuits.

 

We May Identify The Need For Additional Environmental Remediation or Demolition Obligations Relating To Transformation Activities.

 

Delphi is undertaking substantial transformation activities including the sale, closure, and/or demolition of numerous facilities around the world. In the course of this process, environmental investigations and assessments will continue to be performed and we may identify previously unknown environmental conditions or further delineate known conditions that may require remediation or additional costs related to demolition or decommissioning. These findings could trigger additional and possibly material environmental remediation costs above existing reserves and for demolition and decommissioning costs.

 

Debt

 

We Will Maintain And Need to Service Significant Levels Of Debt To Support Our Restructuring And Operations, Which May Further Divert A Significant Amount Of Cash From Our Business Operations.

 

Our net cash used in operating activities totaled $289 million for 2007 and our net cash provided by operating activities totaled $9 million for 2006. The increase in cash used in operating activities is primarily due to payments, net of reimbursement by GM, related to the U.S. employee workforce transition program charges in the amount of $528 million, payments of $155 million related to executive and U.S. salaried employee incentive plans and payments of $153 million to severed employees as part of the DASE Separation

Plan. In addition, cash flow from operating activity is impacted by the timing of payments to suppliers and receipts from customers as well as seasonality of production volumes and the impact of foreign currency exchange rates. Absent a comprehensive restructuring to address our high cost structure in the U.S., over the long term, we expect that our operating activities will continue to use, not generate, cash and that we will need to supplement cash from operations with periodic draws on our revolving portion of our Refinanced DIP Credit Facility.

 

We have substantial levels of debt, including debt under our Refinanced DIP Credit Facility and other debt instruments. We had $2.7 billion in term loans and $255 million of letters of credit outstanding under our Refinanced DIP Credit Facility at December 31, 2007. Additionally, at that time, we had $2.0 billion of debt and $391 million of notes payable, all of which are subject to compromise, $808 million of other debt and $1.2 billion of cash and cash equivalents, including restricted cash. The Refinanced DIP Credit Facility imposes limits on our ability to incur additional debt including our ability to draw down remaining amounts under the $1.75 billion revolver in our Refinanced DIP Credit Facility. Within the limits set forth in those agreements, we may incur additional debt in the future. The degree to which we will be leveraged could have important consequences, including:

 

 

In addition, the Refinanced DIP Credit Facility currently has a maturity date of July 1, 2008. If we are not able to emerge from chapter 11 prior to this maturity date, we would seek to either extend the term of that facility or seek alternative sources of financing. If this were to occur, there can be no assurances that we would be able to extend this facility prior to maturation or otherwise obtain alternative sources of financing. The failure to secure such extension or alternative source of financing would materially adversely impact our business, financial condition and operating results by severely restricting our liquidity.

 

Restrictions And Covenants In the Refinanced DIP Credit Facility Limit Our Ability To Take Certain Actions And Require Us to Satisfy Certain Financial Tests.

 

The agreements governing the Refinanced DIP Credit Facility contain a number of significant covenants which, among other things, will restrict our ability, and the ability of our subsidiaries, to take certain actions. The Refinanced DIP Credit Facility (as defined herein) includes affirmative, negative and financial covenants that impose restrictions on Delphi’s financial and business operations, including Delphi’s ability to, among other things, incur or secure other debt, make investments, sell assets and repurchase stock. Additionally, the Refinanced DIP Credit Facility includes negative covenants that prohibit the payment of dividends by the Company. Generally, so long as the Facility Availability Amount (as defined in the Refinanced DIP Credit Facility) is equal to or greater than $500 million, compliance with the restrictions on investments, mergers and disposition of assets do not apply (except in respect of investments in, and dispositions to, direct or indirect domestic subsidiaries of Delphi that are not guarantors).

 

The covenants in the Refinanced DIP Credit Facility generally require Delphi to, among other things, maintain a rolling 12-month cumulative global earnings before interest, taxes, depreciation, amortization, reorganization and restructuring costs (“Global EBITDAR”), as defined, for Delphi and its direct and indirect subsidiaries, on a consolidated basis, beginning on December 31, 2006 and ending on June 30, 2008, at the levels set forth in the Refinanced DIP Credit Facility. The Refinanced DIP Credit Facility contains certain defaults and events of default customary for debtor-in-possession financings of this type. Upon the occurrence and during the continuance of any default in payment of principal, interest or other amounts due under the Refinanced DIP Credit Facility, interest on all outstanding amounts is payable on demand at 2% above the then applicable rate.

The Refinanced DIP Credit Facility provides the lenders with a first lien on substantially all material tangible and intangible assets of Delphi and its wholly-owned domestic subsidiaries (however, Delphi is only pledging 65% of the stock of its first tier non-U.S. subsidiaries) and further provides that amounts borrowed under the Refinanced DIP Credit Facility will be guaranteed by substantially all of Delphi’s affiliated Debtors, each as debtor and debtor-in-possession.

 

Failure to comply with these covenants could result in an event of default under the Refinanced DIP Credit Facility, which would permit the lender to cause the amounts outstanding to become immediately due and payable. In addition, failure to comply could result in termination of the commitments under our revolving credit facility, which would result in Delphi being prohibited from borrowing additional amounts under such facility.

 

Internal Controls

 

Failure To Achieve And Maintain Effective Internal Controls In Accordance With Section 404 Of The Sarbanes-Oxley Act of 2002 Could Have A Material Effect On Our Business.

 

As a publicly traded company, we are subject to rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires us to include an internal control report from management in this Annual Report on Form 10-K. The internal control report must include the following: (1) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management’s assessment of the effectiveness of our internal control over financial reporting as of December 31 of each fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (4) a statement that our independent registered public accounting firm has issued an attestation report on management’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Our assessment as of December 31, 2007 identified a material weakness in our internal controls over financial reporting, which also adversely impacted our disclosure controls and procedures. A material weakness results in a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result, we must perform extensive additional work to obtain reasonable assurance regarding the reliability of our financial statements. Given the nature of the material weakness identified, even with this additional work there is a risk of errors not being prevented or detected, which could result in further restatements. For additional information refer to Item 9A. Controls and Procedures in this Annual Report.

 

Because of the material weakness referenced in the preceding paragraph, management has concluded that, as of December 31, 2007, our internal controls over financial reporting were not effective based on those criteria. This failure and any failure in the future to achieve and maintain effective internal controls over financial reporting and otherwise comply with the requirements of Section 404 could have a material adverse effect on our business. Such noncompliance could result in perceptions of our business among customers, suppliers, rating agencies, lenders, investors, securities analysts and others being adversely affected. We may not be able to complete our remediation plans designed to address the identified material weakness in our internal controls over financial reporting and continue to attract additional qualified accountants, and auditing and compliance professionals to assist in completing such plans and maintaining compliance programs. There will also continue to be a serious risk that we will be unable to file future periodic reports with the SEC in a timely manner, that a default could result under the covenants governing our Refinanced DIP Credit Facility and that our future financial statements could contain errors that will be undetected.

 

We Face Substantial Costs Associated With Complying With the Requirements of Section 404 of the Sarbanes-Oxley Act.

 

As a result of the extent of the deficiencies in our internal controls over financial reporting, we incurred significant professional fees and other expenses in the year ended December 31, 2007 to prepare our consolidated financial statements and to comply with the requirements of Section 404 of the Sarbanes-Oxley Act. Until our

remediation is completed, we will continue to incur the expenses and management burdens associated with the manual procedures and additional resources required to prepare our consolidated financial statements.

 

We have no unresolved SEC staff comments to report.

 

Delphi’s world headquarters is in Troy, Michigan. Delphi also maintains regional headquarters in Shanghai, China; Bascharage, Luxembourg; and Sao Paulo, Brazil. Excluding our joint ventures and other investments, as of December 31, 2007 we maintained 290 sites in 34 countries throughout the world, including manufacturing facilities, technical centers, customer centers and sales offices. Our business segments share many of the manufacturing facilities throughout the world. As of December 31, 2007, we owned our world headquarters. Of the remaining 289 sites, 26 were owned and 40 were leased in the U.S. and Canada, 32 were owned and 21 were leased in Mexico, 33 were owned and 80 were leased in Europe/Middle East/Africa; 10 were owned and 8 were leased in South America; and 10 were owned and 29 were leased in Asia/Pacific.

 

We continually evaluate our global footprint to enhance support provided to our customers around the world while at the same time controlling associated operating costs. We continue to seek to efficiently locate our global manufacturing, engineering and sales footprint to serve the needs of our VM customers and to reduce instances of over capacity in some of our manufacturing facilities.

 

Bankruptcy Cases

 

Refer to Item 1. Business section in this Annual Report on Form 10-K for further information regarding the chapter 11 cases.

 

Shareholder Lawsuits

 

As previously disclosed, the Company, along with certain of its subsidiaries, current and former directors of the Company, and certain current and former officers and employees of the Company or its subsidiaries, and others are named as defendants in several lawsuits filed following the Company’s announced intention to restate certain of its financial statements in 2005. Through mediated settlement discussions, on August 31, 2007, representatives of Delphi, Delphi’s insurance carriers, certain current and former directors and officers of Delphi, and certain other defendants involved in the securities actions, ERISA actions, and shareholder derivative actions in consolidated proceedings (“the “Multidistrict Litigation” or “MDL”) reached an agreement with the lead plaintiffs in the Securities Actions as defined below (the “Lead Plaintiffs”) and named plaintiffs in the Amended ERISA Action as defined below (the “ERISA Plaintiffs”) resulting in a settlement of the Multidistrict Litigation (the “MDL Settlements”). Pursuant to the MDL Settlements, the class claimants will receive cash and allowed claims in the chapter 11 proceedings that, when valued at the face amount of the allowed claims, is equivalent to approximately $351 million. The MDL Settlements were approved by the District Court in which the actions are pending, and by the Court on January 25, 2008.

 

On September 5, 2007 the U.S. District Court for the Eastern District of Michigan (the “District Court”) entered an order preliminarily certifying the class and approving the settlement and scheduled the matter for a fairness hearing on November 13, 2007. On November 13, the District Court conducted the fairness hearing and took the matter under advisement. On October 29, 2007, the Court entered an order preliminarily approving the MDL Settlements subject to final consideration at the confirmation hearing on Delphi’s plan of reorganization and the Court’s consideration of certain objections that may be filed as to the MDL Settlements. On October 29, 2007, the Court lifted the automatic stay as to the discovery provided to the Lead Plaintiffs. On December 4, 2007, the District Court held another hearing to consider proposed modifications to the MDL Settlements (the “Modified MDL Settlements”), and tentatively approved the Modified MDL Settlements, after determining that the modifications were at least neutral to the Lead Plaintiffs and potentially provide a net benefit to the Lead Plaintiffs. The District Court approved the MDL Settlements in an opinion and order issued on January 10, 2008 and amended on January 11, 2008, and the District Court entered final orders and

judgments dated January 23, 2008 with respect to the securities and ERISA actions. On January 25, 2008, the Court approved the MDL Settlements. As provided in the confirmation order, the MDL Settlements are contingent upon the effective date of the Amended Plan occurring, and if, for any reason, we cannot emerge as contemplated, the MDL Settlements will become null and void. A copy of an addendum setting forth the modification is attached as Exhibit 99(f) to the Company’s Current Report on Form 8-K filed with the SEC on January 30, 2008.

 

The Multidistrict Litigation is comprised of lawsuits in three categories. One group of class action lawsuits, which is purportedly brought on behalf of participants in certain of the Company’s and its subsidiaries’ defined contribution employee benefit pension plans that invested in Delphi common stock, is brought under ERISA (the “ERISA Actions”). Plaintiffs in the ERISA Actions allege, among other things, that the plans suffered losses as a result of alleged breaches of fiduciary duties under ERISA. The ERISA Actions were subsequently transferred to the Multidistrict Litigation. On March 3, 2006, plaintiffs filed a consolidated class action complaint (the “Amended ERISA Action”) with a class period of May 28, 1999 to November 1, 2005. The Company, which was previously named as a defendant in the ERISA Actions, was not named as a defendant in the Amended ERISA Action due to the Chapter 11 Filings, but the plaintiffs stated that they intended to proceed with claims against the Company in the ongoing bankruptcy cases, and will seek to name the Company as a defendant in the Amended ERISA Action if the bankruptcy stay were modified or lifted to permit such action. On May 31, 2007, by agreement of the parties, the Court entered a limited modification of the automatic stay, pursuant to which Delphi is providing certain discovery to the Lead Plaintiffs and other parties in the case.

 

A second group of class action lawsuits alleges, among other things, that the Company and certain of its current and former directors and officers and others made materially false and misleading statements in violation of federal securities laws. On September 30, 2005, the court-appointed Lead Plaintiffs filed a consolidated class action complaint (the “Securities Actions”) on behalf of a class consisting of all persons and entities who purchased or otherwise acquired publicly-traded securities of the Company, including securities issued by Delphi Trust I and Delphi Trust II, during a class period of March 7, 2000 through March 3, 2005. The Securities Actions name several additional defendants, including Delphi Trust II, certain former directors, and underwriters and other third parties, and includes securities claims regarding additional offerings of Delphi securities. The Securities Actions consolidated in the United States District Court for Southern District of New York (and a related securities action filed in the United States District Court for the Southern District of Florida concerning Delphi Trust I) were subsequently transferred to the District Court as part of the Multidistrict Litigation. The action is stayed against the Company pursuant to the Bankruptcy Code, but is continuing against the other defendants. On February 15, 2007, the District Court partially granted the plaintiffs’ motion to lift the stay of discovery provided by the Private Securities Litigation Reform Act of 1995, thereby allowing the plaintiffs to obtain certain discovery from the defendants. On April 16, 2007, by agreement of the parties, the Court entered a limited modification of the automatic stay, pursuant to which Delphi is providing certain discovery to the Lead Plaintiffs and other parties in the case.

 

The third group of lawsuits is comprised of shareholder derivative actions against certain current and former directors and officers of the Company (“Shareholder Derivative Actions”). A total of four complaints were filed: two in the federal court (one in the Eastern District of Michigan and another in the Southern District of New York) and two in Michigan state court (Oakland County Circuit Court in Pontiac, Michigan). These suits alleged that certain current and former directors and officers of the Company breached a variety of duties owed by them to Delphi in connection with matters related to the Company’s restatement of its financial results. The federal cases were consolidated with the securities and ERISA class actions in the U.S. District Court. Following the filing on October 8, 2005 of the Debtors’ petitions for reorganization relief under chapter 11 of the Bankruptcy Code, all the derivative cases were administratively closed.

 

The following is a summary of the principal terms of the MDL Settlements as they relate to the Company and its affiliates and related parties and is qualified in its entirety by reference to the complete agreements submitted to the Court for approval and which were filed as exhibits to the Company’s Current Report on Form 8-K dated September 5, 2007.

 

Under the terms of the Modified MDL Settlements, the Lead Plaintiffs and the ERISA Plaintiffs will receive claims that will be satisfied through Delphi’s Amended Plan as confirmed by the Court pursuant to the confirmation order described under Item 1.03 of the Company’s Current Report on Form 8-K filed with the SEC

on January 30, 2008. The Lead Plaintiffs will be granted an allowed claim in the face amount of $179 million, which will be satisfied by Delphi providing $179 million in consideration in the same form, ratio, and treatment as that which will be used to pay holders of general unsecured claims under its Amended Plan. Additionally, the Lead Plaintiffs will receive $15 million to be provided by a third party. Delphi has also agreed to provide the Lead Plaintiffs, on behalf of the class members, the ability to exercise their rights in the anticipated discount rights offering in connection with the Amended Plan through a notice mechanism and a pledge of cash collateral. If an individual plaintiff opts out of the settlement reached with the Lead Plaintiffs and ultimately receives an allowed claim in Delphi’s chapter 11 cases, the amount received by the opt-out plaintiff will be deducted from the settlement reached with the Lead Plaintiffs. Delphi will object to any claims filed by opt-out plaintiffs in the Court, and will seek to have such claims expunged. The settlement with the ERISA Plaintiffs is structured similarly to the settlement reached with the Lead Plaintiffs. The ERISA Plaintiffs’ claim will be allowed in the amount of approximately $25 million and will be satisfied with consideration in the same form, ratio, and treatment as that which will be used to pay holders of general unsecured claims under the Plan. Unlike the settlement reached with the Lead Plaintiffs, the ERISA Plaintiffs will not be able to opt out of their settlement.

 

In addition to the amounts to be provided by Delphi from the above described claims in its chapter 11 cases, the Lead Plaintiffs will also receive a distribution of insurance proceeds of up to approximately $89 million, including a portion of the remainder of any insurance proceeds that are not used by certain former officers and directors who are named defendants in various actions, and a distribution of approximately $2 million from certain underwriters named as defendants in the Securities Actions. In addition, Delphi’s insurance carriers have also agreed to provide $20 million to fund any legal expenses incurred by certain of the former officer and director named defendants in defense of any future civil actions arising from the allegations raised in the securities cases. The ERISA Plaintiffs will also receive a distribution of insurance proceeds in the amount of approximately $22 million. Settlement amounts from insurers and underwriters were paid and placed in escrow by September 25, 2007 pending Court approval.

 

The MDL Settlements include a dismissal with prejudice of the ERISA and Securities Actions and a full release as to certain named defendants, including Delphi, Delphi’s current directors and officers, the former directors and officers who are named defendants, and certain of the third-party defendants. The Company also received a demand from a shareholder that the Company consider bringing a derivative action against certain current and former directors and officers premised on allegations that certain current and former directors and officers made materially false and misleading statements in violation of federal securities laws and/or of their fiduciary duties. The Company appointed a committee of the Board of Directors (the “Special Committee”) to evaluate the shareholder demand. As a component of the MDL Settlements, the Special Committee determined not to assert these claims; however, it has retained the right to assert the claims as affirmative defenses and setoffs against any action to collect on a proof of claim filed by those individuals named in the demand for derivative action should the Company determine that it is in its best interests to do so.

 

As a result of the MDL Settlements, as of December 31, 2007, Delphi has a liability of $351 million recorded for this matter. The expense incurred for this matter was $343 million during 2007. Delphi maintains directors and officers insurance providing coverage for indemnifiable losses of $100 million, subject to a $10 million deductible; and a further $100 million of insurance covering its directors and officers for nonindemnifiable claims, for a total of $200 million. As part of the settlement, the insurers contributed the entire $100 million of indemnifiable coverage, and a portion of the nonindemnifiable coverage. Delphi had previously recorded an initial reserve in the amount of its $10 million insurance deductible, and net of related payments, had an $8 million liability recorded as of December 31, 2006. Based on the modifications to the MDL Settlements discussed above, Delphi reduced its liability by approximately $10 million during December 2007. As discussed above, in conjunction with the MDL Settlements, Delphi expects to record recoveries of $148 million for the settlement amounts provided to the plaintiffs from insurers, underwriters, and third-party reimbursements and will record such recoveries upon Delphi’s emergence from chapter 11.

 

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.

Under section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect prepetition indebtedness or to exercise control over the property of the debtor’s estate. Absent an order of the Court, substantially all prepetition liabilities are subject to settlement under a plan of reorganization. The Amended Plan sets forth the treatment of claims against and interest in the Debtors. (Refer to Note 2. Transformation Plan and Chapter 11 Bankruptcy to the consolidated financial statements for details on the chapter 11 cases). Under the Amended Plan, the automatic stay remains in effect until the effective date of the Amended Plan.

 

Environmental Matters and other Regulatory Matters

 

Delphi is subject to the requirements of U.S. federal, state, local and non-U.S. environmental and occupational safety and health laws and regulations. For a discussion of matters relating to compliance with laws for the protection of the environment, refer to Item 1. Business — Environmental Compliance in this Annual Report on Form 10-K.

 

As previously disclosed, with respect to environmental matters, Delphi has received notices that it is a potentially responsible party (“PRP”) in proceedings at various sites, including the Tremont City Landfill Site (the “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 U.S. Environmental Protection Agency (“EPA”) to perform a Remedial Investigation and Feasibility Study concerning a portion of the Site. The Remedial Investigation and Alternatives Array Document were finalized in 2007. A Feasibility Study and Record of Decision are expected to be completed in 2008. Although Delphi believes that capping and future monitoring is a reasonably possible outcome, a different cleanup approach ultimately may be required for the Site. Because the manner of remediation is yet to be determined, it is possible that the resolution of this matter may require Delphi to make material future expenditures for remediation, possibly over an extended period of time and possibly in excess of existing reserves. As of December 31, 2007, Delphi has recorded its best estimate of its share of the remediation based on the remedy described above. However, if that remedy is not accepted, Delphi’s expenditures for remediation could increase by $20 million in excess of its existing reserves. Delphi will continue to re-assess any potential remediation costs and, as appropriate, its environmental reserve as the investigation proceeds.

 

Warranty Matters

 

With respect to warranty matters, although Delphi cannot assure that the future costs of warranty claims by customers will not be material, Delphi believes its established reserves are adequate to cover potential warranty settlements. However, the final amounts required to resolve these matters could differ materially from the Company’s recorded estimates. Additionally, in connection with the Separation, Delphi agreed to indemnify GM against substantially all losses, claims, damages, liabilities or activities arising out of or in connection with its business post-Separation for which it is determined Delphi has responsibility. Due to the nature of such indemnities, Delphi is not able to estimate the maximum amount thereof.

 

GM Warranty Settlement Agreement

 

As previously disclosed, GM alleged that catalytic converters supplied by Delphi’s Powertrain Systems segment to GM for certain 2001 and 2002 vehicle platforms did not conform to specifications. In May 2007 GM informed Delphi that it has experienced higher than normal warranty claims with respect to certain 2003-2005 vehicle models due to instrument clusters previously supplied by Delphi’s Automotive Holdings Group segment. Effective December 2007, the responsibility for this product line was transferred to the Electronics and Safety segment. In 2007, Delphi reached a tentative agreement with GM to resolve these claims along with certain other known warranty matters. Based on the agreement, Delphi recorded $83 million of additional warranty expense in cost of sales, net of $8 million of recovery, primarily related to the Electronics and Safety and Powertrain segments. On September 27, 2007, the Court authorized Delphi to enter into a Warranty, Settlement, and Release Agreement (the “Warranty Settlement Agreement”) with GM resolving these and certain other known warranty matters. Under the terms of the Warranty Settlement Agreement, Delphi will pay GM up to an estimated $199 million, comprised of approximately $127 million to be paid in cash over time as noted below, and up to approximately $72 million to be paid in the form of delivery by Delphi to GM of replacement product. The Warranty Settlement Agreement settles all outstanding warranty claims and issues related to any component or

assembly supplied by Delphi to GM, which as of August 10, 2007 are (i) known by GM, subject to certain specified exceptions, (ii) believed by GM to be Delphi’s responsibility in whole or in part, and (iii) in GM’s normal investigation process, or which should have been within that process, but were withheld for the purpose of pursuing a claim against Delphi. Included in the settlement are all warranty claims set forth in GM’s amended proof of claim filed on July 31, 2006 in connection with Delphi’s chapter 11 cases (“GM’s Proof of Claim”).

 

In addition, the Warranty Settlement Agreement limits Delphi’s liability related to certain other warranty claims that have become known by GM on or after June 5, 2007, and generally prohibits both GM and Delphi from initiating actions against the other related to any warranty claims settled in the agreement. In accordance with the Warranty Settlement Agreement, Delphi’s claims agent has reduced the liquidated component relating to warranty claims contained in GM’s Proof of Claim by approximately $530 million which includes, among other things, those personal injury claims asserted in GM’s Proof of Claim that relate to warranty claims settled in the agreement, and has expunged with prejudice the unliquidated component relating to warranty claims asserted in GM’s Proof of Claim. Pursuant to the Warranty Settlement Agreement, GM is foreclosed from bringing any type of claim set forth on the exhibits attached thereto, if it is shown that on or before August 10, 2007, (i) GM knew about the claim, (ii) the amount of the claim exceeded $1 million, or GM believed the claim would exceed $1 million, (iii) the claim is in GM’s investigation process or GM determined that it should have been in GM’s investigation process but excluded it from that process for the purpose of pursuing a claim against Delphi, and (iv) GM believed or reasonably should have believed that Delphi had some responsibility for the claim.

 

Delphi elected to defer amounts due under the Warranty Settlement Agreement until it receives payments from GM on or about the time of its emergence from chapter 11. As a result, GM will set off these payments against the amounts then payable to Delphi by GM. Since Delphi has elected to defer these payments, GM will receive interest at the rate of 6% per annum on the payment from November 1, 2007, until the amounts are paid by Delphi or set off against amounts payable by GM.

 

Other Warranty Matters

 

During 2007, Delphi observed higher than normal warranty claims on engine electronic control units supplied for certain 2005-2007 vehicle models by Delphi’s Powertrain Systems segment and recorded $93 million of additional warranty expense in cost of sales in 2007.

 

During 2006, Delphi’s Thermal Systems segment began experiencing quality issues regarding compressor parts that were purchased from one of Delphi’s affiliated suppliers and subsequently established warranty reserves of $59 million to cover the cost of various repairs that may be implemented. As of December 31, 2007, the related warranty reserve is $41 million.

 

Intellectual Property Matters

 

In December 2007, the Company concluded patent license negotiations with Denso and reached a settlement agreement in connection with variable valve timing technology. Under the settlement agreement, which is subject to the Court’s approval, the Company is authorized to use the technology pursuant to a license agreement with Denso, and the Company will pay Denso a royalty based upon the sales of products containing the technology. On February 5, 2008, the Company filed a motion with the Court seeking approval of the settlement agreement, and the Court hearing is scheduled for February 29, 2008.

 

Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. After discussions with counsel, it is the opinion of Delphi 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.

 

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.

 

The name, age, current position and a description of the business experience 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.

 

 

Mr. Miller was named executive chairman of Delphi Corporation in January 2007. Mr. Miller previously served as chairman and chief executive officer of Delphi Corporation from July 1, 2005. Prior to joining Delphi, Mr. Miller had been non-executive chairman of Federal-Mogul Corporation, a global automotive component supplier, from January 2004 until June 2005. Mr. Miller served in various positions with Federal-Mogul since 1993, including a previous term as non-executive chairman from January to October 2001, and three times in a transition role as chief executive officer in 1996, again in 2000 and again from July 2004 until February 2005. From September 2001 until December 2003, Mr. Miller was the chairman and chief executive officer of Bethlehem Steel Corporation, a steel manufacturing company. Mr. Miller serves on the Board of Directors of United Airlines Corporation and Symantec Corporation.

 

Mr. O’Neal became president and chief executive officer of Delphi Corporation in January 2007. He was president and chief operating officer of Delphi Corporation from January 7, 2005. Prior to that position, Mr. O’Neal served as president of Delphi’s former Dynamics, Propulsion and Thermal sector from January 2003 and as executive vice president and president of Delphi’s former Safety, Thermal and Electrical Architecture sector from 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. Mr. O’Neal serves on the Board of Directors of Goodyear Tire & Rubber Company and Sprint Nextel Corporation.

 

Mr. Dellinger was named executive vice president and chief financial officer of Delphi Corporation effective October 8, 2005. From June 2002 to September 2005, Mr. Dellinger served as executive vice president and chief financial officer of Sprint Corporation, where he also was executive vice president – finance from April 2002 to June 2002. Before joining Sprint, Mr. Dellinger served as president and chief executive officer of GE Frankona Re based in Munich, Germany with responsibility for the European

operations of General Electric’s Employers Reinsurance Corporation, a global reinsurer, from 2000 to 2002. From 2001 to 2002, he also served as president and chief executive officer of General Electric’s Employers Reinsurance Corporation’s Property and Casualty Reinsurance business in Europe and Asia. From 1997 to 2000, he served as executive vice president and chief financial officer of General Electric’s Employers Reinsurance Corporation. Other positions Mr. Dellinger held at GE include manager of finance for GE Motors and Industrial Systems and director of finance and business development for GE Plastics Pacific based in Singapore. Mr. Dellinger has been a director of SIRVA, INC. since March 2003.

 

Mr. Weber was named executive vice president, global business services of Delphi Corporation, effective July 2006. He served as executive vice president, Operations, Human Resource Management and Corporate Affairs for Delphi since January 2000. He is the executive champion for Delphi’s Harley-Davidson Customer Team.

 

Mr. Bertrand was named president of Delphi Automotive Holdings Group Division, effective January 2004. Prior to this position, Mr. Bertrand served a dual role as president of Delphi’s Automotive Holdings Group Division since January 2003 and President of Delphi’s former Safety & Interior Systems Division since January 2000. He has been a vice president of Delphi since 1998.

 

Mr. Hachey was named president of Delphi Powertrain Systems Division and president for Delphi Europe, Middle East and Africa effective July 2006. Previously he served as president of the former Delphi Energy & Chassis Division effective January 2000. He has been a vice president of Delphi since 1998. Mr. Hachey is a Board Member of CLEPA (Supplier Association For Europe).

 

Mr. Ordonez was named vice president of Delphi Corporation and president of Delphi Product and Service Solutions effective March 2002. He served as finance manager for GM España from 1981 to 1984 and as finance director. He joined Delphi in 1988 and has held a number of finance and business planning positions including director of finance for Delphi Safety & Interior Systems. He was named general manager of Product and Service Solutions in October 1999. Mr. Ordonez serves on the Board of Directors of Motor Equipment Manufacturers Association (MEMA).

 

Mr. Owens was named vice president of Delphi Corporation and president of Delphi Electronics and Safety division effective September 2001. He also serves as president for Delphi Asia Pacific. Previously, Mr. Owens served as general director of Business Line Management, effective October 2000. Mr. Owens serves on the Engineering Advisory Board of Directors of Purdue University and the Central Indiana Corporate Partnership Board.

 

Mr. Pirtle was named president of Delphi Thermal Systems division effective July 2006. Previously, he served as president of the former Delphi Thermal & Interior division, effective January 2004. Prior to that, he had been president of the former Delphi Harrison Thermal Systems division from November 1998. He has been a vice president of Delphi since 1998. Mr. Pirtle serves on the Advisory Board of Focus Hope Detroit.

 

Mr. Remenar was named vice president of Delphi Corporation and president of Delphi Steering division, effective April 2002. Prior to that position, he had been the executive director of business lines for Delphi’s former Energy & Chassis division since January 2000.

 

Mr. Sheehan was named vice president and chief restructuring officer for Delphi Corporation effective October 2005. Prior to this position, he served as acting chief financial officer since March 2005. Mr. Sheehan also served as chief accounting officer and controller from July 1, 2002 through July, 2006. 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.

 

Mr. Sherbin was named vice president and general counsel for Delphi Corporation effective October 2005. He was appointed chief compliance officer in January 2006. Previously, Mr. Sherbin was vice president, general counsel and secretary for Pulte Homes, Inc., a national homebuilder, from January 2005 through September 2005. Prior to joining Pulte Homes, Inc., he was senior vice president, general counsel and secretary for Federal-Mogul Corporation, a global automotive component supplier, from April 2003 through December 2004 and vice president, deputy general counsel and secretary from March 2001 through March 2003. Mr. Sherbin serves on the Board of Directors of the Michigan Center for Civic Education.

Mr. Spencer was named vice president of Delphi Corporation and president of Delphi Electric/Electronic Architecture division, formerly Packard Electric Systems division, effective November 2000. He also serves as president for Delphi South America and Mexico effective July 2006.

 

For purposes of calculating the aggregate market value of Delphi’s common stock held by non-affiliates, as shown on the cover page of this report, it has been assumed that all the outstanding shares were held by non-affiliates, except for the shares held by directors, and executive officers of Delphi. However, this should not be deemed to constitute an admission that all such persons of Delphi are, in fact, affiliates of Delphi, or that there are not other persons who may be deemed to be affiliates of Delphi. Further information concerning shareholdings of executive officers, directors and principal shareholders is included in Part III, Item 12 in this Annual Report on Form 10-K.

 

 

On October 11, 2005, the New York Stock Exchange (“NYSE”) announced suspension of trading of Delphi Corporation’s (referred to as “Delphi,” the “Company,” “we,” or “our”) common stock (DPH), 61/2% Notes due May 1, 2009 (DPH 09), and its 71/8% debentures due May 1, 2029 (DPH 29), as well as the 8.25% Cumulative Trust Preferred Securities of Delphi Trust I (DPH PR A). This action followed the NYSE’s announcement on October 10, 2005 that it was reviewing Delphi’s continued listing status in light of Delphi’s announcements involving the filing of voluntary petitions for reorganization relief under chapter 11 of the Bankruptcy Code. The NYSE subsequently determined to suspend trading based on the trading price for the common stock, which closed at $0.33 on October 10, 2005, and completed delisting procedures on November 11, 2005.

 

Delphi’s common stock (OTC: DPHIQ) is being traded as of the date of filing this Annual Report on Form 10-K with the SEC on the Pink Sheets, LLC (the “Pink Sheets”), a quotation service for over the counter (“OTC”) securities, and is no longer subject to the regulations and controls imposed by the NYSE. Delphi’s preferred shares (OTC: DPHAQ) ceased trading on the Pink Sheets November 14, 2006 on the same day the property trustee of each Trust liquidated each Trust’s assets in accordance with the terms of the applicable trust declarations. Pink Sheets is a centralized quotation service that collects and publishes market maker quotes for OTC securities in real-time. Delphi’s listing status on the Pink Sheets is dependent on market makers’ willingness to provide the service of accepting trades to buyers and sellers of the stock. Unlike securities traded on a stock exchange, such as the NYSE, issuers of securities traded on the Pink Sheets do not have to meet any specific quantitative and qualitative listing and maintenance standards. As of the date of filing this Annual Report on Form 10-K with the SEC, Delphi’s 61/2% Notes due May 1, 2009 (DPHIQ.GB) and 71/8% debentures due May 1, 2029 (DPHIQ.GC) are also trading OTC via the Trade Reporting and Compliance Engine (TRACE), a NASD-developed reporting vehicle for OTC secondary market transactions in eligible fixed income securities that provides debt transaction prices.

 

The Transfer Agent and Registrar for our common stock is Computershare. On December 31, 2007 and January 31, 2008, there were 278,006 and 277,418 holders of record, respectively, of our common stock.

 

On September 8, 2005, the Board of Directors announced the elimination of Delphi’s quarterly dividend on Delphi common stock. In addition, the Refinanced DIP Credit Facility and the Amended DIP Credit Facility include a negative covenant, which prohibit the payment of dividends by the Company. The Company does not expect to pay dividends prior to emergence.

 

The following table sets forth the high and low sales price per share of our common stock, as reported by OTC. Refer to Note 20. Share-Based Compensation of the consolidated financial statements in this Annual Report for additional information regarding equity compensation plans.

 

 

 

Purchase Of Equity Securities By The Issuer And Affiliated Purchasers

 

No shares were purchased by the Company or on its behalf by any affiliated purchaser in the fourth quarter of 2007 and the Company did not have a share repurchase program during 2007.

 

 

The following selected financial data reflects the results of operations and balance sheet data for the years ended 2003 to 2007. Prior period amounts have been restated for discontinued operations. The data below should be read in conjunction with, and is qualified by reference to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included elsewhere in this Annual Report. The financial information presented may not be indicative of our future performance.

 

In October 2005, the Debtors filed voluntary petitions for reorganization relief under chapter 11 of the Bankruptcy Code. The Debtors have continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. Delphi’s non-U.S. subsidiaries were not included in the filings, continue their business operations without supervision from the U.S. courts and are not subject to the requirements of the Bankruptcy Code. For additional information on the bankruptcy cases, refer to Note 2. Transformation Plan and Chapter 11 Bankruptcy to the consolidated financial statements in this Annual Report.

 

 

 

 

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to help you understand the business operations and financial condition of Delphi Corporation.

 

Executive Summary of Business

 

Delphi Corporation is a global supplier of vehicle electronics, engine management systems, safety components, thermal management systems and other transportation components. In addition, our technologies are present in communication, computer, energy and medical applications. We operate in extremely competitive markets. Our customers select us based upon numerous factors, including technology, quality and price. Our efforts to generate new business do not immediately affect our financial results, because supplier selection in the auto industry is generally finalized several years prior to the start of production of the vehicle. As a result, business that we win in 2007 will generally not impact our financial results until 2009 or beyond.

 

In light of our continued deterioration in performance in recent years, we determined that it was necessary to address and resolve our United States (“U.S.”) legacy liabilities, product portfolio, operational issues and profitability requirements. As a result, we intensified our efforts during 2005 to engage our unions, as well as General Motors Corporation (“GM”), in discussions seeking consensual modifications that would permit us to align our U.S. operations to our strategic portfolio and be competitive with our U.S. peers, and to obtain financial support from GM to implement our restructuring plan. Despite significant efforts to reach a resolution, we determined that these discussions were not likely to lead to the implementation of a plan sufficient to address our issues on a timely basis and that we needed to pursue other alternatives to preserve value for our stakeholders.

 

Accordingly, to transform and preserve the value of the Company, which requires resolution of existing legacy liabilities and the resulting high cost of U.S. operations, on October 8, 2005 (the “Petition Date”), Delphi and certain of its U.S. subsidiaries (the “Initial Filers”) filed voluntary petitions for reorganization relief under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Court”), and on October 14, 2005, three additional U.S. subsidiaries of Delphi (together with the Initial Filers, collectively, the “Debtors”) filed voluntary petitions for reorganization relief under chapter 11 of the Bankruptcy Code (collectively, the Debtors’ October 8, 2005 and October 14, 2005 filings are referred to herein as the “Chapter 11 Filings”) in the Court. The Court is jointly administering these cases as “In re Delphi Corporation, et al., Case No. 05-44481 (RDD).” We continue to operate our business as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. Delphi’s non-U.S. subsidiaries were not included in the filings, continue their business operations without supervision from the Court and are not subject to the requirements of the Bankruptcy Code.

 

On September 6, 2007, Delphi filed its proposed plan of reorganization (the “Plan”) and related disclosure statement (the “Disclosure Statement”) with the Court. The Plan and Disclosure Statement outline Delphi’s transformation centering around five core areas, as detailed below, including agreements reached with each of Delphi’s principal U.S. labor unions and GM. At a Court hearing on September 27, 2007, Delphi stated that the current dynamics of the capital markets prompted Delphi to consider whether amendments to the Plan filed on September 6 might be necessary. Delphi commenced its Disclosure Statement hearing on October 3, 2007, and after resolving certain objections, requested that the hearing continue on October 25, 2007. During October and November, the Court granted additional requests by Delphi to further continue the hearing on the adequacy of the Disclosure Statement to allow Delphi to negotiate potential amendments to the Plan and the related agreements with its stakeholders, including the comprehensive agreements reached with GM and the Equity Purchase and Commitment Agreement (“July EPCA”) between Delphi and certain affiliates of lead investor Appaloosa Management L.P. (“Appaloosa”), Harbinger Capital Partners Master Fund I, Ltd. (“Harbinger”), Pardus Capital Management, L.P. (“Pardus”) and Merrill Lynch, Pierce, Fenner & Smith, Incorporated (“Merrill”), UBS Securities LLC (“UBS”), and Goldman Sachs & Co. (“Goldman”) (collectively the

“Investors”). On December 3, 2007, Delphi filed further potential amendments to the Plan, the comprehensive agreements reached with GM, the July EPCA, and the related Disclosure Statement and on December 4, 2007 Delphi announced that it had reached agreement in principle on these amendments with the Creditors’ Committee, the Equity Committee, GM, and the Investors. On December 10, 2007, Delphi and the Investors entered into an amendment to the July EPCA (together with the July EPCA, the “EPCA”). After a hearing on the adequacy of the proposed Disclosure Statement on December 6 and 7, 2007, on December 10, 2007, Delphi filed its first amended joint Plan of Reorganization (“Amended Plan”) and its first amended Disclosure Statement with respect to the Amended Plan (“Amended Disclosure Statement”). The Court entered an order approving the adequacy of the Amended Disclosure Statement on December 10, 2007. After entry of the order approving the Amended Disclosure Statement, Delphi began solicitation of votes on the Amended Plan. On January 16, 2006, Delphi filed further modifications to the Amended Plan. Additional modifications are set forth in Exhibit A to the Confirmation Order which was entered on January 25, 2008. On January 16, 2008, Delphi announced that the voting results, which are summarized below, had been filed with the Court. A hearing on confirmation of the Amended Plan took place on January 17, 18, and 22, 2008. The Court entered the order confirming the Amended Plan on January 25, 2008, and that order became final on February 4, 2008. In order to consummate the Amended Plan several conditions precedent set forth in section 12.2 of the Amended Plan must be satisfied or waived in accordance with section 12.3 of the Amended Plan. The remaining conditions to be satisfied subsequent to receipt of the order confirming the Amended Plan include:

 

 

While Delphi is working to satisfy the conditions set forth above there can be no assurances that all conditions to the consummation of the Amended Plan will be satisfied in a timely manner. Delphi’s ability to satisfy the conditions set forth above is affected by the substantial uncertainty and a significant decline in capacity in the credit markets and operational challenges due to the overall climate in the U.S. automotive industry. Refer to the rest of this Item 7 and Item 1A. Risk Factors, Risk Factors Specifically Related to our Current Reorganization Cases Under Chapter 11 of the U.S. Bankruptcy Code and Business Environment and Economic Conditions for further discussions. In the event that one or more conditions cannot be satisfied in a timely manner, it is likely that Delphi and certain of its U.S. subsidiaries would continue as “debtors-in-possession” in chapter 11, until one of the following occurs: the order confirming the Amended Plan is modified, a further amended plan of reorganization is confirmed or other dispositive action is taken. In addition, in the event the Amended Plan is not consummated, approvals obtained in connection with the confirmation of the Amended Plan, may become null and void, including:

 

 

 

In the event the Amended Plan does not become effective and the approvals obtained in connection therewith will become null and void, Delphi likely would engage in alternate actions in furtherance of its transformation plan, including working with its stakeholders to review and revise the Amended Plan to reflect the change in circumstances. There can be no assurances that Delphi would be successful in these alternative actions or any other actions necessary in the event the Amended Plan is not consummated or the orders confirming the Amended Plan or other related approvals will become null and void.

 

In addition, the Refinanced DIP Credit Facility (as defined in this Item 7) currently has a maturity date of July 1, 2008. If Delphi is not able to emerge from chapter 11 prior to this maturity date, Delphi would seek to either extend the term of that facility or seek alternative sources of financing. If this were to occur, there can be no assurances that Delphi would be able to extend this facility prior to maturation or otherwise obtain alternative sources of financing. The failure to secure such extension or alternative source of financing would materially adversely impact our business, financial condition and operating results by severely restricting our liquidity. See also Item 1A. Risk Factors, Risk Factors Specifically Related to our Current Reorganization Cases Under Chapter 11 of the U.S. Bankruptcy Code, and Debt.

 

In the event the conditions to the EPCA have not been satisfied or waived (and absent revisions) prior to March 31, 2008, the terms of the EPCA provide that Delphi and an affiliate of Appaloosa each will have the unilateral right to terminate the EPCA. In addition, absent revisions to the settlement and restructuring agreements with GM, these agreements may be terminated by Delphi or GM if the effective date of the Amended Plan has not occurred by March 31, 2008 and the EPCA has been terminated prior thereto. However, if the effective date of the Amended Plan has not occurred by March 31, 2008 and the EPCA has not been terminated by such date the agreements with GM may be terminated by Delphi or GM on the earlier of the termination of the EPCA or April 30, 2008.

 

Delphi is working to satisfy or obtain waivers with respect to the principal conditions in the EPCA and GM settlement and restructuring agreements but there can be no assurances that it can satisfy all conditions or obtain necessary waivers or amendments. These conditions include conditions relating to exit financing and certain funding waivers applicable to Delphi’s U.S. pension obligations. With respect to the exit financing conditions contained in the Amended Plan and EPCA, it is expected that on the effective date of the Amended Plan our existing debtor-in-possession financing will be replaced with approximately $6.1 billion of new exit financing. However, the U.S. and global credit markets currently are challenging and in particular the market for leveraged loans is marked by substantial uncertainty and a significant decline in capacity. Delphi is in discussions with the Investors and GM regarding implementation of exit financing. There can be no assurances as to whether such exit financing can be obtained. On February 12, 2008, GM confirmed that it is exploring alternatives with Delphi in the event that the planned financing level is not achieved. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Plan of Reorganization and Transformation Plan, Equity Purchase and Commitment Agreement for more information.

 

In addition, with respect to implementing the transfer of certain of Delphi’s unfunded pension obligations to a pension plan sponsored by GM, the Internal Revenue Service (“IRS”) and Pension Benefit Guaranty Corporation (“PBGC”) have agreed to certain waivers that are necessary for the transfers to proceed, which waivers are conditioned upon Delphi emerging from chapter 11 by February 29, 2008. Delphi currently does not believe that it will emerge by such date and is discussing a possible extension of such waivers with the IRS and PBGC through at least March 31, 2008. If Delphi does not emerge from chapter 11 on or before the expiration of the conditional waivers, there can be no assurance that Delphi will be able to negotiate a revised funding plan with the IRS and PBGC, that GM will agree that any revised funding plan satisfies the conditions to consummation of the other transactions called for by the global settlement and restructuring agreements, or that any plan agreed to will not result in the need for substantially greater cash contributions or that Delphi will be able to satisfy such increased obligations. If the Amended Plan, including the settlement agreements reached with GM, does not become effective and the transactions contemplated thereby are not consummated such that Delphi does not emerge from chapter 11 on or before the expiration of the conditional

waivers, the PBGC may immediately draw down the $150 million letter of credit, the PBGC could initiate an involuntary plan termination, missed contributions would become due and the IRS could assess penalties on the missed contributions. Although Delphi would likely contest such assessment, the PBGC could consider our failure to immediately fund our plans a basis to call for an involuntary termination of the plans. Refer to Note 2. Transformation Plan and Chapter 11 Bankruptcy for further information on Delphi’s discussions with the IRS and the PBGC.

 

Plan of Reorganization and Transformation Plan

 

Elements of Transformation Plan

 

On March 31, 2006, we announced our transformation plan centered around five key elements, each of which is also addressed in our Amended Plan and the series of settlement agreements it embodies. The progress on each element is discussed below.

 

Labor — Modify our labor agreements to create a more competitive arena in which to conduct business.

 

During the second quarter of 2007, Delphi signed an agreement with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”), and during the third quarter of 2007, Delphi signed agreements with the remainder of its principal U.S. labor unions, which were ratified by the respective unions and approved by the Court in the third quarter of 2007. Among other things, as approved and confirmed by the Court, this series of settlement agreements or memoranda of understanding among Delphi, its unions, and GM settled the Debtors’ motion under sections 1113 and 1114 of the Bankruptcy Code seeking authority to reject their U.S. labor agreements and to modify retiree benefits (the “1113/1114 Motion”). As applicable, these agreements also, among other things, modify, extend or terminate provisions of the existing collective bargaining agreements among Delphi and its unions and cover issues such as site plans, workforce transition and legacy pension and other postretirement benefits obligations as well as other comprehensive transformational issues. The UAW settlement agreement includes extending, until March 31, 2008, our obligation to indemnify GM if certain GM-UAW benefit guarantees are triggered. Portions of these agreements have already become effective, and the remaining portions will not become effective until the effectiveness of the GSA and the MRA with GM and upon substantial consummation of the Amended Plan as confirmed by the Court. The Amended Plan incorporates, approves and is consistent with the terms of each agreement.

 

These U.S. labor settlement agreements include those with the:

 

 

Subject to these settlement agreements, the existing collective bargaining agreements:

 

 

Among other things, these agreements generally provided certain members of the union labor workforce options to either retire, accept a voluntary severance package or accept lump sum payments in return for lower future hourly wages. Refer to Note 15. U.S. Employee Workforce Transition Programs to the consolidated financial statements for more information.

 

On September 4, 2007, the Court confirmed that the 1113/1114 Motion was withdrawn without prejudice, subject to the Court’s prior settlement approval orders pertaining to each of Delphi’s U.S. labor unions, as it relates to all parties and the intervening respondents, by entry of an Order Withdrawing Without Prejudice Debtors’ Motion For Order Under 11 U.S.C. § 1113(c) Authorizing Rejection Of Collective Bargaining Agreements And Authorizing Modification Of Retiree Welfare Benefits Under 11 U.S.C. § 1114(g).

 

GM — Conclude negotiations with GM to finalize financial support for certain of our legacy and labor costs and to ascertain GM’s business commitment to Delphi going forward.

 

Delphi and GM have entered into comprehensive settlement agreements consisting of a Global Settlement Agreement, as amended (the “GSA”) and a Master Restructuring Agreement, as amended (the “MRA”). The GSA and the MRA comprised part of the Amended Plan and were approved in the order confirming the Amended Plan on January 25, 2008. The GSA and MRA are not effective until and unless Delphi emerges from chapter 11. Accordingly, the accompanying consolidated financial statements do not include any adjustments related to the GSA or the MRA. These agreements will produce a material reduction in Delphi’s liabilities related to the workforce transition programs. Delphi will account for the impact of the GSA or the MRA when the conditions of the agreements are satisfied, which will likely occur upon emergence from chapter 11.

 

 

The GSA is intended to resolve outstanding issues between Delphi and GM that have arisen or may arise before Delphi’s emergence from chapter 11, and will be implemented by Delphi and GM in the short term. On November 14, 2007 and again on December 3, 2007, Delphi entered into restated amendments to both the GSA and the MRA. Together, these agreements provide for a comprehensive settlement of all outstanding issues between Delphi and GM (other than ordinary course matters), including: litigation commenced in March 2006 by Delphi to terminate certain supply agreements with GM; all potential claims and disputes with GM arising out of the separation of Delphi from GM in 1999; certain post-separation claims and disputes between Delphi and GM; the proofs of claim filed by GM against Delphi in Delphi’s chapter 11 cases; GM’s treatment under Delphi’s Amended Plan; and various other legacy issues.

 

In addition to establishing claims treatment, including specifying which claims survive and the consideration to be paid by Delphi to GM in satisfaction of certain claims, the GSA addresses, among other things, commitments by Delphi and GM regarding other postretirement benefit and pension obligations, and other GM contributions with respect to labor matters and releases.

 

The MRA is intended to govern certain aspects of Delphi and GM’s commercial relationship following Delphi’s emergence from chapter 11. The MRA addresses, among other things, the scope of GM’s existing and future business awards to Delphi and related pricing agreements and sourcing arrangements, GM commitments with respect to reimbursement of specified ongoing labor costs, the disposition of certain Delphi facilities, and the treatment of existing agreements between Delphi and GM. Through the MRA, Delphi and GM have agreed to certain terms and conditions governing, among other things:

 

 

The GSA and MRA may be terminated by the Company or GM if the effective date of the Amended Plan has not occurred by March 31, 2008 and the EPCA has been terminated. However, if the effective date of the Amended Plan has not occurred by March 31, 2008 and the EPCA has not been terminated by such date the GSA and MRA may be terminated by the Company or GM on the earlier of the termination of the EPCA or April 30, 2008.

 

Portfolio — Streamline Delphi’s product portfolio to capitalize on world-class technology and market strengths and make the necessary manufacturing alignment with its new focus.

 

In March 2006, Delphi identified non-core product lines and manufacturing sites that do not fit into Delphi’s future strategic framework, including brake and chassis systems, catalysts, cockpits and instrument panels, door modules and latches, ride dynamics, steering, halfshafts, and wheel bearings. Effective November 1, 2006, in connection with the Company’s continuous evaluation of its product portfolio, we decided that our power products business no longer fit within its future product portfolio and that business line was moved to Delphi’s Automotive Holdings Group. With the exception of the catalyst product line, included

in the Powertrain Systems segment, and the steering and halfshaft product lines and interiors and closures product lines included in discontinued operations, these non-core product lines are included in the Company’s Automotive Holdings Group segment, refer to Note 21. Segment Reporting to the consolidated financial statements.

 

Throughout 2007, Delphi has continued sale and wind-down efforts with respect to non-core product lines and manufacturing sites. The sale and wind-down process is being conducted in consultation with the Company’s customers, unions and other stakeholders to carefully manage the transition of affected product lines. The disposition of any U.S. operation is also being accomplished in accordance with the requirements of the Bankruptcy Code and union labor contracts as applicable. The Company also has begun consultations with the works councils in accordance with applicable laws regarding any sale or wind-down of affected manufacturing sites in Europe.

 

During 2007, Delphi either obtained Court approval to sell or closed on sales for the global steering and halfshaft businesses, our interiors and closures product line, catalysts product line and brake hose business. Refer to Note 5. Discontinued Operations and Note 6. Acquisitions and Divestitures to the consolidated financial statements for more information.

 

Costs recorded in 2007 and 2006 related to the transformation plan for non-core product lines in addition to the charge described above include impairments of long-lived assets of $271 million and $187 million, respectively (of which $78 million and $144 million were recorded as a component of long-lived asset impairment charges and $193 million and $43 million were recorded as a component of loss on discontinued operations), and employee termination benefits and other exit costs of $371 million and $57 million, respectively (of which $230 million and $27 million were recorded as a component of cost of sales, $9 million and less than $1 million were recorded as a component of selling, general and administrative expenses, and $132 million and $30 million were recorded as a component of loss on discontinued operations). Included in employee termination benefits and other exit costs for 2007 were $268 million related to a manufacturing facility in Cadiz, Spain discussed below.

 

Cost Structure — Transform our salaried workforce and reduce general and administrative expenses to ensure that its organizational and cost structure is competitive and aligned with our product portfolio and manufacturing footprint.

 

Delphi is continuing to implement restructuring initiatives in furtherance of the transformation of its salaried workforce to reduce selling, general and administrative expenses to support its realigned portfolio. These initiatives include financial services and information technology outsourcing activities, reduction in our global salaried workforce by taking advantage of attrition and using salaried separation plans, and realignment of our salaried benefit programs to bring them in line with more competitive industry levels. Given the investment required to implement these initiatives, we do not expect to fully realize substantial savings until 2009 and beyond.

 

Pensions — Devise a workable solution to our current pension funding situation, whether by extending contributions to the pension trusts or otherwise.

 

Delphi’s discussions with the IRS and the PBGC regarding the funding of the Delphi Hourly-Rate Employees Pension Plan (the “Hourly Plan”) and the Delphi Retirement Program for Salaried Employees (the “Salaried Plan”) upon emergence from chapter 11 culminated in a funding plan that would enable the Company to satisfy its pension funding obligations upon emergence from chapter 11 through a combination of cash contributions and a transfer of certain unfunded liabilities to a pension plan sponsored by GM. On May 1, 2007, the IRS issued conditional waivers for the Hourly Plan and Salaried Plan with respect to the plan year ended September 30, 2006 (the “2006 Waivers”). On May 31, 2007, the Court authorized Delphi to perform under the terms of those funding waivers. The IRS modified the 2006 Waivers by extending the dates by which Delphi is required to file its Amended Plan and emerge from chapter 11. On September 28, 2007, the IRS issued a second conditional waiver for the Hourly Plan for the plan year ended September 30, 2007 (the “2007 Hourly Plan Waiver”). The 2007 Hourly Plan Waiver is necessary to make the transfer of hourly pension obligations to the GM plan economically efficient by avoiding redundant cash contributions that

would result in a projected overfunding of the Hourly Plan. On October 26, 2007, the Court authorized Delphi to perform under the 2007 Hourly Plan Waiver. The conditional funding waivers will permit Delphi to defer funding contributions due under ERISA and the IRC until February 29, 2008.

 

The pertinent terms of the 2006 Waivers, as modified, include that the effective date of the Company’s plan of reorganization must occur no later than February 29, 2008. Effective June 16, 2007, Delphi provided to the PBGC letters of credit in favor of the Hourly and Salaried Plans in the amount of $100 million to support funding obligations under the Hourly Plan and $50 million to support funding obligations under the Salaried Plan. Not later than five days after the effective date of the Company’s plan of reorganization, the Company must either (1) effect a transfer under IRC § 414(l) to a GM plan, (2) make cash contributions to the Hourly Plan, or (3) make a combination thereof that reduces the net unfunded liabilities of the Hourly Plan by $1.5 billion as determined on a basis in accordance with FASB Statement No. 87, “Employers’ Accounting for Pensions.”

 

Not later than five days after the effective date of the Company’s plan of reorganization, the Company must contribute approximately $1.25 billion to the Hourly and Salaried Plans with approximately $1.05 billion in plan contributions and approximately $200 million into escrow. These contributions include additional contributions required by the conditional waivers as extended.

 

The Company has represented that it intends to meet the minimum funding standard under IRC section 412 for the plan years ended September 30, 2006 and 2007 upon emergence from chapter 11. The Company is seeking an extension of the waiver terms with the IRS and the PBGC as they relate to the effective date of the Amended Plan. The foregoing description of the pension funding plan is a summary only and is qualified in its entirety by the terms of the waivers and the orders of the Court.

 

In addition to the funding strategy discussed above and the changes to the Hourly Plan discussed in the Labor section, Delphi committed to freeze the Hourly and Salaried Plans effective upon emergence from chapter 11 which resulted in curtailment charges of $59 million and $116 million, respectively, in 2007. Refer to Note 16. Pension and Other Postretirement Benefits for more information.

 

Contract Rejection and Assumption Process

 

Section 365 of the Bankruptcy Code permits the Debtors to assume, assume and assign, or reject certain prepetition executory contracts subject to the approval of the Court and certain other conditions. Rejection constitutes a Court-authorized breach of the contract in question and, subject to certain exceptions, relieves the Debtors of their future obligations under such contract but creates a deemed prepetition claim for damages caused by such breach or rejection. Parties whose contracts are rejected may file claims against the rejecting Debtor for damages. Generally, the assumption, or assumption and assignment, of an executory contract requires the Debtors to cure all prior defaults under such executory contract and to provide adequate assurance of future performance. Additional liabilities subject to compromise and resolution in the chapter 11 cases have been asserted as a result of damage claims created by the Debtors’ rejection of executory contracts.

 

Thousands of contracts for the supply of goods to the Company’s manufacturing operations were scheduled to expire by December 31, 2005. In order to provide an alternative mechanism to extend those contracts for the supply of sole-sourced goods required by the Company following expiration, avoid interruption of automotive parts manufacturing operations associated with supplier concerns, and systematically address the large number of contracts expiring at the end of 2005 and throughout 2006 and 2007, the Company requested and was granted authority by the Court to assume certain contracts on a limited, focused, and narrowly-tailored basis. To date, the Company has been able to extend nearly all of its expiring supplier contracts in the ordinary course of business and has made use of the provisions of the Court order as circumstances have warranted. Under the Amended Plan, all executory contracts and unexpired leases to which any of the Debtors is a party will be deemed automatically assumed in accordance with the provisions and requirements of sections 365 and 1123 of the Bankruptcy Code as of the effective date of the Amended Plan, unless such executory contracts or unexpired leases (i) will have been previously rejected by Delphi pursuant to a final order of the Court, (ii) are the subject of a motion to reject pending on or before such effective date, (iii) have expired or been terminated on or prior to December 31, 2007 (and not otherwise extended) pursuant to their own terms, (iv) are listed on an exhibit to the Amended Plan as rejected executory contracts or

unexpired leases, or (v) are otherwise rejected pursuant to the terms of the Amended Plan. The entry of the order confirming the Amended Plan is also the order approving the rejections and assumptions described in the Amended Plan. Notwithstanding the foregoing or anything else in Article VIII of the Amended Plan, (i) all executory contracts or unexpired leases between GM and any of the Debtors will receive the treatment described in the GSA and the MRA between Delphi and GM, (ii) all agreements, and exhibits or attachments thereto, between the Delphi’s unions and Delphi will receive the treatment described in Article 7.21 of the Amended Plan and the union settlement agreements, and (iii) all executory contracts memorializing ordinary course customer obligations (as defined in the Amended Plan) will receive the treatment described in Article 5.2 of the Amended Plan.

 

The Amended Plan of Reorganization

 

The Amended Disclosure Statement and Amended Plan are based upon a series of global settlements and compromises that involved every major constituency of Delphi and its affiliated Debtors’ reorganization cases, including Delphi’s principal U.S. labor unions, GM, the official committee of unsecured creditors (the “Creditors’ Committee”) and the official committee of equity security holders (the “Equity Committee”) appointed in Delphi’s chapter 11 cases, and the lead plaintiffs in certain securities and Employee Retirement Income Security Act (“ERISA”) multidistrict litigation (on behalf of holders of various claims based on alleged violations of federal securities law and ERISA), and include detailed information regarding the treatment of claims and interests and an outline of the EPCA and rights offering. The Amended Disclosure Statement also outlines Delphi’s transformation centering around the five core areas discussed above.

 

The Court entered an order approving the adequacy of the Amended Disclosure Statement on December 10, 2007. After entry of the order approving the Amended Disclosure Statement, Delphi began solicitation of votes on the Amended Plan. On January 16, 2008, Delphi filed further modifications to the Amended Plan. Additional modifications are set forth in Exhibit A to the Confirmation Order entered on January 25, 2008. On January 16, 2008, Delphi announced that the voting results had been filed with the Court. Voting by classes of creditors and holders of interest (including shareholders) entitled to vote on the Amended Plan illustrates broad-based support for the Amended Plan. Eighty-one percent of all voting general unsecured creditors voted to accept the Amended Plan (excluding ballots cast by GM, plaintiffs in the MDL, and holders of interests). Of the total amount voted by all general unsecured creditors classes, seventy-eight percent voted to accept the Amended Plan. One hundred percent of the ballots cast in the GM and MDL classes voted to accept the Amended Plan. Seventy-eight percent of voting shareholders voted to accept the Amended Plan.

 

The recoveries, distributions, and investments pursuant to the confirmed Amended Plan are as follows:

 

 

Delphi entered into a “best efforts” engagement letter and fee letter with JPMorgan Securities, Inc., JPMorgan Chase Bank, N.A., and Citigroup Global Markets Inc. in connection with an exit financing arrangement, with the goal of emergence from chapter 11 as soon as practicable.

 

Pursuant to an order entered by the Court on December 20, 2007, the Debtors’ exclusivity period under the Bankruptcy Code for filing a plan of reorganization was extended to and including March 31, 2008, and the Debtors’ exclusivity period for soliciting acceptances of the Amended Plan was extended to and including May 31, 2008.

 

Equity Purchase and Commitment Agreement

 

Delphi was party to (i) a Plan Framework Support Agreement (the “PSA”) with Cerberus Capital Management, L.P. (“Cerberus”), Appaloosa, Harbinger, Merrill, UBS and GM, which outlined a framework for the Amended Plan, including an outline of the proposed financial recovery of the Company’s stakeholders and the treatment of certain claims asserted by GM, the resolution of certain pension funding issues and the corporate governance of reorganized Delphi, and (ii) an Equity Purchase and Commitment Agreement (the “Terminated EPCA”) with affiliates of Cerberus, Appaloosa and Harbinger (the “Investor Affiliates”), as well as Merrill and UBS, pursuant to which these investors would invest up to $3.4 billion in reorganized Delphi. Both the PSA and the Terminated EPCA were subject to a number of conditions, including Delphi reaching consensual agreements with its U.S. labor unions and GM.

On April 19, 2007, Delphi announced that it anticipated negotiating changes to the Terminated EPCA and the PSA and that it did not expect that Cerberus would continue as a plan investor. On July 7, 2007, pursuant to Section 12(g) of the Terminated EPCA, Delphi sent a termination notice of the Terminated EPCA to the other parties to the Terminated EPCA. As a result of the termination of the Terminated EPCA, a Termination Event (as defined in the PSA) occurred, and all obligations of the parties to the PSA under the PSA were immediately terminated and were of no further force and effect. Delphi incurred no fees under the Terminated EPCA as a result of this termination.

 

On July 18, 2007, Delphi announced that it had accepted a new proposal for an equity purchase and commitment agreement (the July EPCA) submitted by a group comprising a number of the original plan investors (Appaloosa, Harbinger, Merrill, and UBS) as well as Goldman Sachs & Co. and an affiliate of Pardus Capital Management, L.P. On August 2, 2007, the Court granted the Company’s motion for an order authorizing and approving the July EPCA and on August 3, 2007, the Investors and the Company executed the July EPCA. Under the EPCA (as described below), the Investors may invest up to $2.55 billion in preferred and common equity in the reorganized Delphi to support the Company’s transformation plan announced on March 31, 2006 on the terms and subject to the conditions contained in the EPCA.

 

As noted above, during October and November 2007, Delphi negotiated potential amendments to the July EPCA. On December 10, 2007, the Investors and Delphi entered into an amendment, dated August 3, 2007, to the July EPCA to reflect events and developments since then, including those relating to Court approvals in connection with negotiated amendments to the July EPCA (the “EPCA Amendment” and together with the July EPCA, the “EPCA”); delivery of a revised disclosure letter by the Company; delivery of a revised business plan by the Company; updates and revisions to representations and warranties; agreements with principal labor unions; the execution and amendment of certain settlement agreements with GM; and the execution of a best efforts financing letter and the filing of a plan of reorganization and disclosure statement. Further, the EPCA Amendment amends provisions relating to the discount rights offering (including the replacement of existing common stockholders with unsecured creditors). Finally, the EPCA Amendment revised the July EPCA to reflect certain economic changes for recoveries provided under the plan of reorganization, and a post-emergence capital structure which includes Series C Preferred Stock to be issued to GM.

 

Under the terms and subject to the conditions of the EPCA, the Investors will commit to purchase $800 million of convertible preferred stock and approximately $175 million of common stock in the reorganized Company. Additionally, the Investors will commit to purchasing any unsubscribed shares of common stock in connection with an approximately $1.6 billion rights offering that will be made available to unsecured creditors subject to satisfaction of other terms and conditions. The rights offering would commence sometime following confirmation of the Company’s Amended Plan and conclude approximately 20 days thereafter, prior to the Company’s emergence from chapter 11.

 

The EPCA is subject to the satisfaction or waiver of numerous conditions, including the condition that an affiliate of Appaloosa is reasonably satisfied with the terms of certain material transaction documents (evidenced by such affiliate of Appaloosa not delivering a deficiency notice), to the extent the terms thereof would have an impact on the Investors’ proposed investment in the Company and receipt of proceeds from the sale of preferred stock, exit financing and the discount rights offering sufficient to fund the transaction contemplated by the EPCA and certain related transactions. Other conditions to closing include release and exculpation of each Investor as set forth in the EPCA Amendment; that the Company will have undrawn availability of $1.4 billion including a letter of credit carve out and reductions under a borrowing base formula; that the Company’s pro forma interest expense during 2008 on the Company’s indebtedness, as defined in the EPCA, will not exceed $585 million; that scheduled Pension Benefit Guarantee Corporation liens are withdrawn; and that the aggregate amount of trade and unsecured claims be no more than $1.45 billion (subject to certain waivers and exclusions).

 

Delphi can terminate the EPCA in certain circumstances, including at any time on or after March 31, 2008 if the Amended Plan has not become effective. An affiliate of Appaloosa can terminate the EPCA, including, at any time on or after March 31, 2008, if the Amended Plan has not become effective; if the Company has

changed its recommendation or approval of the transactions contemplated by the EPCA, the Amended Plan terms or the settlement with GM in a manner adverse to the Investors or approved or recommended an alternative transaction; or if the Company has entered into any agreement, or taken any action to seek Court approval relating to any plan, proposal, offer or transaction, that is inconsistent with the EPCA, the settlement with GM or the Amended Plan. In the event of certain terminations of the EPCA pursuant to the terms thereof, the Company may be obligated to pay the Investors $83 million plus certain transaction expenses in connection with an alternative investment transaction as described in the immediately following paragraph.

 

In exchange for the Investors’ commitment to purchase common stock and the unsubscribed shares in the rights offering, the Company paid an aggregate commitment fee of $39 million and certain transaction expenses and in exchange for the Investors’ commitment to purchase preferred stock the Company paid an aggregate commitment fee of $18 million. In addition, the Company paid an arrangement fee of $6 million to Appaloosa to compensate Appaloosa for arranging the transactions contemplated by the EPCA. The Company has deferred the recognition of these amounts in other current assets as they will be netted against the proceeds from the EPCA upon issuance of the new shares. The Company is required to pay the Investors $83 million plus certain transaction expenses if (a) the EPCA is terminated as a result of the Company’s agreeing to pursue an alternative investment transaction with a third party or (b) either the Company’s Board of Directors withdraws its recommendation of the transaction or the Company willfully breaches the EPCA, and within the next 24 months thereafter, the Company then agrees to an alternative investment transaction. The Company also has agreed to pay out-of-pocket costs and expenses reasonably incurred by the Investors or their affiliates subject to certain terms, conditions and limitations set forth in the EPCA. In no event, however, shall the Company’s aggregate liability under the EPCA, including any liability for willful breach, exceed $250 million.

 

The EPCA also includes certain corporate governance provisions for the reorganized Company, each of which has been incorporated into Delphi’s Amended Plan. The reorganized Company will be governed initially by a nine-member, classified Board of Directors consisting of the Company’s Chief Executive Officer and President (“CEO”), and Executive Chairman, three members nominated by Appaloosa, three members nominated by the statutory creditors’ committee, and one member nominated by the co-lead investor representative on a search committee with the approval of either the Company or the statutory creditors’ committee. As part of the new corporate governance structure, the current Company’s Board of Directors along with the Investors, mutually agreed that Rodney O’Neal will continue as CEO of the reorganized Company. Subject to certain conditions, six of the nine directors will be required to be independent from the reorganized Company under applicable exchange rules and independent of the Investors.

 

A five-member search committee will select the Company’s post-emergence Executive Chairman, have veto rights over all directors nominated by the Investors and statutory committees, and appoint initial directors to the committees of the Company’s Board of Directors. The search committee consists of a representative from the Company’s Board of Directors, a representative of each of the Company’s two statutory committees, a representative from Appaloosa and a representative of the other co-investors (other than UBS, Goldman and Merrill). Appaloosa, through its proposed preferred stock ownership, will have certain veto rights regarding extraordinary corporate actions, such as change of control transactions and acquisitions or investments in excess of $250 million in any twelve-month period after issuance of the preferred stock.

 

Executive compensation for the reorganized company must be on market terms, must be reasonably satisfactory to Appaloosa, and the overall executive compensation plan design must be described in the Company’s disclosure statement and incorporated into the Plan.

 

The EPCA incorporates Delphi’s earlier commitment to preserve its salaried and hourly defined benefit U.S. pension plans and to fund required contributions to the plans that were not made in full as permitted under the Bankruptcy Code. In particular, as more fully outlined in the agreement, the effectiveness and consummation of the transactions contemplated by the EPCA are subject to a number of conditions precedent, including, among others, agreement on certain key documents and those conditions relating to financing of the emergence transactions.

The foregoing description of the EPCA does not purport to be complete and is qualified in its entirety by reference to the July EPCA, which is filed as an exhibit to the quarterly report, for the quarter ended June 30, 2007, and the EPCA Amendment filed as an exhibit to the Company’s Current Report on Form 8-K/A dated December 12, 2007.

 

There can be no assurances that the Debtors will be successful in achieving their objectives. Effectiveness of the Amended Plan is subject to a number of conditions, including the completion of the transactions contemplated by the EPCA (which are in turn subject to a number of conditions noted above), the entry of certain orders by the Court and the obtaining of exit financing. There can be no assurances that such exit financing will be obtained or such other conditions will be satisfied, and we cannot assure that the Amended Plan will become effective on the terms described herein or at all. In accordance with U.S. GAAP, the cost related to the transformation plan will be recognized in the Company’s consolidated financial statements as elements of the Amended Plan, as the U.S. labor agreements, the GSA, and the MRA become effective. The Amended Plan and agreements will significantly impact Delphi’s accounting for its pension plans, post-retirement benefit plans, other employee related benefits, long-lived asset impairments and exit costs related to the sites planned for closure or consolidation, compensation costs for labor recognized over the term of the U.S. labor agreements, and the fair values assigned to assets and liabilities upon Delphi’s emergence from chapter 11, among others. Such adjustments will have a material impact on Delphi’s financial statements.

 

There are a number of risks and uncertainties inherent in the chapter 11 process, including those detailed in Part I, Item 1A. Risk Factors in this Annual Report. In addition, we cannot assure that potential adverse publicity associated with the Chapter 11 Filings and the resulting uncertainty regarding our future prospects will not materially hinder our ongoing business activities and our ability to operate, fund and execute our business plan by impairing relations with existing and potential customers; negatively impacting our ability to attract, retain and compensate key executives and associates and to retain employees generally; limiting our ability to obtain trade credit; and impairing present and future relationships with vendors and service providers.

 

DASE Liquidation

 

Delphi’s Chapter 11 Filings related solely to its U.S. operations as Delphi’s operations outside the United States generally have positive cash flow. Nevertheless, Delphi has been seeking and will continue to seek to optimize its global manufacturing footprint to lower its overall cost structure by focusing on strategic product lines where it has significant competitive and technological advantages and selling or winding down non-core product lines. In particular, in February 2007, Delphi’s indirect wholly-owned Spanish subsidiary, Delphi Automotive Systems España, S.L. (“DASE”), announced the planned closure of its sole operation at the Puerto Real site in Cadiz, Spain. The closure of this facility is consistent with Delphi’s transformation plan previously announced in March 2006. The facility, which had approximately 1,600 employees, was the primary holding of DASE.

 

On March 20, 2007, DASE filed a petition for Concurso, or bankruptcy under Spanish law, exclusively for that legal entity. In an order dated April 13, 2007, the Spanish court declared DASE to be in voluntary Concurso, which provides DASE support by managing the process of closing the Puerto Real site in Cadiz, Spain in accordance with applicable Spanish law. The Spanish court subsequently appointed three receivers of DASE (the “DASE Receivers”). During the Concurso process, DASE commenced negotiations on a social plan and a collective layoff procedure related to the separation allowance with the unions representing the affected employees. On July 4, 2007, DASE, the DASE Receivers, and the workers’ councils and unions representing the affected employees reached a settlement on a social plan of €120 million (then approximately $161 million) for a separation allowance of approximately 45 days of salary per year of service to each employee (the “Separation Plan”). Delphi concluded that it was in its best interests to voluntarily provide the €120 million to DASE as well as additional funds to DASE in an amount not to exceed €10 million (then approximately $14 million) for the purpose of funding payment of the claims of DASE’s other creditors.

 

As a result of the Spanish court declaring DASE to be in Concurso and the subsequent appointment of the DASE Receivers, Delphi no longer possesses effective control over DASE and has de-consolidated the

financial results of DASE effective April 2007. The total expense in 2007 associated with the exit of the Puerto Real site in Cadiz, Spain is approximately $268 million ($107 million in discontinued operations and $161 million in the Automotive Holdings segment).

 

Overview of Performance During 2007

 

Delphi believes that several significant issues have largely contributed to our financial performance, including (a) a competitive U.S. vehicle production environment for domestic original equipment manufacturers resulting in the reduced number of motor vehicles that GM, our largest customer, produces annually in the U.S. and pricing pressures; (b) increasing commodity prices; (c) U.S. labor legacy liabilities and noncompetitive wage and benefit levels; and (d) restrictive collectively bargained labor agreement provisions which have historically inhibited Delphi’s responsiveness to market conditions, including exiting non-strategic, non-profitable operations or flexing the size of our unionized workforce when volume decreases. Although the 2006 UAW and IUE-CWA U.S. employee workforce transition programs and the U.S. labor settlement agreements entered into in 2007 will allow us to reduce our legacy labor liabilities, transition our workforce to more competitive wage and benefit levels and allow us to exit non-core product lines, such changes will occur over several years, and are partially dependent on GM being able to provide significant financial support. We are beginning to see the benefits of decreased labor costs, primarily through lower costs of sales and the resultant improvement in gross margin. However, we still have future costs to incur to complete our transformation plan, divest of non-core operations and realign our cost structure to match our more streamlined product portfolio.

 

In light of the current economic climate in the U.S. automotive industry, Delphi is facing considerable challenges due to revenue decreases in the U.S. and related pricing pressures stemming from a substantial reduction in GM’s North American vehicle production in recent years. Our sales to GM have declined since our separation from GM, principally due to declining GM North American production, the impact of customer-driven price reductions and the exit of non-profitable businesses, as well as GM’s diversification of its supply base and ongoing changes in our content per vehicle and the product mix purchased. During 2007, GM North America produced 4.1 million vehicles, excluding CAMI Automotive Inc., New United Motor Manufacturing, Inc. and HUMMER H2 brand vehicle production, a decrease of 8% from 2006 production levels.

 

During 2007 we continued to be challenged by commodity cost increases, most notably copper, aluminum, petroleum-based resin products, steel and steel scrap. We have been seeking to manage these and other material related 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, hedging of certain commodities and other means. In the case of copper, which primarily affects the Electrical/Electronic Architecture segment, contract escalation clauses have enabled us to pass on some of the price increases to our customers and thereby partially offset the impact of contractual price reductions on net sales for the related products. However, 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 2007. We will seek to negotiate these cost increases and related prices with our customers, but if we are not successful, our operations in future periods may be adversely affected. Except as noted below in Results of Operations, our overall 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 in order to recover the actual commodity costs we are incurring. Despite the challenges identified above, in 2007 Delphi achieved net material performance (including cost adjustments from suppliers, material cost improvement initiatives and commodity market changes) on a year-over-year basis.

Overview of Net Sales and Net Loss

 

 

Our non-GM sales from continuing operations in 2007, including the impact of migration during the period of certain product programs from direct sales to GM to sales to customers which ultimately sell our products to GM as a sub-assembly of their final part (“Tier I”), increased 4% from 2006 and represented 63% of total net sales from continuing operations. In 2007, GM sales from continuing operations decreased 11% from 2006 and represented 37% of total net sales from continuing operations. 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. The decreased net loss in 2007 included U.S. employee workforce transition program charges of $212 million in 2007 compared to $2.7 billion in 2006 (see Note 15. U.S. Employee Workforce Transition Programs to the consolidated financial statements), a reduction of $271 million in employee termination benefits and other exit costs, and a reduction of $74 million in long-lived asset impairment charges. These improvements were offset partially by charges related to the assets held for sale for the Steering and Interiors and Closures Businesses of $595 million, including the impact of curtailment loss on pension benefits for impacted employees, a $343 million charge resulting from the settlement of the securities and ERISA litigation, and an increase in interest expense of $342 million primarily due to the recognition of $411 million of prepetition debt and allowed unsecured claims. Despite the continued growth of our non-GM business, we continue to experience poor financial performance.

 

Discontinued Operations

 

Delphi expects to dispose of its Interiors and Closures Business and the Steering Business. The Court approval of Delphi’s plan to dispose of Interiors and Closures and the Steering Business triggered held for sale accounting under SFAS 144 in 2007.

 

Steering and Halfshaft Product Line Sale

 

On December 10, 2007, Delphi announced that it had filed a motion in the Court seeking authority to enter into a Purchase and Sale Agreement (the “Purchase Agreement”) with a wholly-owned entity of Platinum Equity, LLC, Steering Solutions Corporation (“Platinum”), for the sale of the Steering Business and a Transaction Facilitation Agreement with GM (the “Transaction Agreement”). On December 20, 2007, the Court approved bidding procedures authorizing Delphi to commence an auction under section 363 of the Bankruptcy Code to dispose of the Steering Business. On January 25, 2008, the Debtors announced that they will seek final Court approval to sell the Steering Business to Platinum at a sale hearing on February 21, 2008. Delphi plans to conclude the sale as soon as Court approval and all regulatory approvals have been received. Upon the Debtors’ review with GM, GM supported the Debtors’ decision to seek final Court approval of the sale to Platinum. In 2007, Delphi recognized a charge of $507 million related to the assets held for sale of the Steering Business, including $26 million of curtailment loss on pension benefits for impacted employees. Delphi expects proceeds from the sale and related Transaction Agreement to approximate $250 million.

 

Interiors and Closures Product Line Sale

 

On February 20, 2007, Delphi announced that it had signed a non-binding term sheet with the Renco Group, Inc. for the sale of its interiors and closures product line. On October 15, 2007, Delphi and certain of its affiliates entered into a Master Sale and Purchase Agreement with Inteva Products, LLC (“Inteva”), a

wholly owned subsidiary of the Renco Group, and certain of its affiliates (the “Interiors and Closures Agreement”) for the sale of substantially all of the tangible assets primarily used in the Interiors and Closures Business. Concurrently, the Debtors filed a motion requesting a hearing to approve bidding procedures in connection with the sale. On October 26, 2007, the Court approved those bidding procedures. On December 20, 2007, the Court approved the sale of the Interiors and Closures Business to Inteva and scheduled a hearing on the sale motion, as it pertains to certain proposed assigned contracts covered by unresolved objections. On January 25, 2008, the Court entered an order approving the assumption and assignment of the executory contracts covered by such objections, all of which were resolved prior to the January 25, 2008 hearing. On that date, the Court also approved a compromise with Inteva, which facilitates the closing of the sale of the Interiors and Closures Business with Inteva by modifying the payment structure under the Interiors and Closures Agreement in consideration for the waiver of certain of Inteva’s conditions to closing. The sale is expected to close in the first quarter of 2008. In 2007, Delphi recognized a charge of $88 million related to the assets held for sale of the Interiors and Closures Business, including $8 million of curtailment loss on pension benefits for impacted employees. Delphi expects proceeds from the sale to approximate $100 million consisting of $63 million of cash and the remainder in notes at fair value.

 

As of December 31, 2007 Interiors and Closures and the Steering Business are reported as discontinued operations in the consolidated statement of operations and statement of cash flows, and includes the impairment charges recorded during 2007. The assets and liabilities of Interiors and Closures and the Steering Business are reported as held for sale and included in assets and liabilities held for sale in the consolidated balance sheet. The results of prior periods have been restated to reflect this presentation.

 

Acquisitions and Divestitures

 

As detailed below, the results of operations associated with Delphi’s acquisitions and divestitures and the gain or loss on the divestitures were not significant to the consolidated financial statements in any period presented.

 

Catalyst Product Line Sale

 

On September 28, 2007, Delphi closed on the sale of its global original equipment and aftermarket catalyst business (the “Catalyst Business”) to Umicore for approximately $67 million which included certain post-closing working capital adjustments. Delphi recorded the loss of $30 million on the sale of the Catalyst Business in cost of sales 2007.

 

North American Brake Product Asset Sale

 

On September 17, 2007, Delphi and TRW Integrated Chassis Systems, LLC signed an Asset Purchase Agreement for the sale of certain assets for its North American brake components machining and assembly assets (“North American Brake Components”) located at Saginaw, Michigan, Spring Hill, Tennessee, Oshawa, Ontario Canada and Saltillo, Mexico facilities for a purchase price of approximately $40 million. On November 16, 2007, Delphi received approval from the Court to proceed with the sale of the assets which closed in the first quarter of 2008.

 

Battery Product Line Sale

 

In 2005, Delphi sold its battery product line, with the exception of two U.S. operations, to Johnson Control, Inc. (“JCI”). In 2006, Delphi sold certain assets related to one of the remaining facilities to JCI, and in 2007, Delphi ceased production at the remaining U.S. battery manufacturing facility, and closed the facility. In 2006, Delphi received approximately $10 million as agreed upon in the 2005 agreement between Delphi and GM, the principal battery customer, which was executed in connection with the sale of Delphi’s battery business. In accordance with the 2005 agreement, upon completion of the transition of the supply of battery products to JCI, Delphi received a $6 million payment in 2007, which was recorded as a reduction to cost of sales.

Brake Product Line Sales

 

On September 28, 2007, Delphi closed on the sale of substantially all of the assets exclusively used in the brake hose product line produced at one of Delphi’s manufacturing sites located in Dayton, Ohio (the “Brake Hose Business”). The sales price for the Brake Hose Business was $10 million and the sale resulted in a gain of $2 million, which was recorded as a reduction to cost of sales in the third quarter of 2007. On July 19, 2007, Delphi received approval from the Court to proceed with the sale of certain assets used in the brake and chassis modules product lines manufactured in a plant located in Saltillo, Mexico (the “Mexico Brake Plant Business”) for $15 million. The sale of the Mexico Brake Plant Business closed on October 1, 2007 and resulted in a gain of $4 million, which was recorded as a reduction to cost of sales in the fourth quarter of 2007.

 

SDAAC Additional Investment

 

In 2006, Delphi’s Thermal Systems segment made an additional investment in Shanghai Delphi Automotive Air Conditioning Co. (“SDAAC”) for approximately $14 million, which increased its equity ownership interest in SDAAC from 34 percent to 50 percent. SDAAC’s annual revenues for 2005 were approximately $133 million. In the third quarter of 2006 Delphi obtained a controlling management interest in SDAAC and began consolidating the entity. Prior to obtaining a controlling management interest, the entity was accounted for using the equity method.

 

MobileAria Asset Sale

 

In 2006, Delphi’s Electronics and Safety division sold certain of its assets in MobileAria, a consolidated entity, which resulted in a gain of $7 million which has been recognized as a reduction of cost of sales.

 

Bearings Product Line Sale

 

On January 15, 2008, the Debtors filed a motion with the Court seeking authority to enter into a sale and purchase agreement (the “Bearings Agreement”) with a wholly owned entity of Resilience Capital Partners, LLC, ND Acquisition Corp (“Resilience Capital”), for the sale of Delphi’s global bearings business (the “Bearings Business”). On January 25, 2008, the Court approved the bidding procedures authorizing Delphi to commence an auction under section 363 of the Bankruptcy Code to sell the Bearings Business. Following completion of the bidding procedures process, a final sale hearing is scheduled for February 21, 2008.

Results of Operations

 

2007 versus 2006

 

The Company’s sales and operating results for the years ended December 31, 2007 and 2006 were as follows:

 

 

 

 

Delphi typically experiences fluctuations in sales due to customer production schedules, sales mix and the net of new and lost business (which we refer to collectively as volume), increased prices attributable to escalation clauses in our supply contracts for recovery of increased commodity costs (which we refer to as commodity pass-through), fluctuations in foreign currency exchange rates (which we refer to as FX), contractual reductions of the sales price to the customer (which we refer to as contractual price reductions) and design changes. Occasionally business transactions or non-recurring events may impact sales as well.

Delphi typically experiences fluctuations in operating income due to volume, contractual price reductions, cost savings due to materials or manufacturing efficiencies (which we refer to collectively as operational performance), and employee termination benefits and other exit costs.

 

Net Sales

 

Net Sales from continuing operations for the year ended December 31, 2007 versus December 31, 2006.  Total sales for 2007 decreased $454 million. Below is a summary of Delphi’s sales for this period.

 

 

Total sales for 2007 decreased $454 million primarily due to reductions in volume and contractual price reductions. Offsetting these decreases were favorable fluctuations in foreign currency exchange rates, primarily driven by the Euro, Brazilian Real, Korean Won, and Chinese Renminbi, commodity pass-through, primarily due to copper and an increase of $53 million due to design changes. Additionally, total sales were favorably impacted by $109 million of additional sales from Shanghai Delphi Automotive Air Conditioning Company (“SDAAC”) in the Thermal Systems product segment. Effective July 1, 2006, we acquired a controlling position in SDAAC; prior to obtaining management control, our investment in SDAAC was accounted for using the equity method.

 

GM sales for 2007 decreased $1,043 million to 37% of total sales, primarily due to decreases in volume of 8% and contractual price reductions. During 2007, our GM North America content per vehicle was $1,562, 7.8% lower than the $1,695 content per vehicle for 2006. The decrease to GM sales was offset slightly due to favorable fluctuations in foreign currency exchange rates, driven by the Euro, Brazilian Real, Korean Won and Chinese Renminbi, commodity pass-through, primarily due to copper, and design changes of $62 million.

 

Other customer sales for 2007 increased by $589 million to 63% of total sales, primarily due to favorable foreign currency exchange impacts, commodity pass-through, and $109 million due to our acquisition of a controlling position in SDAAC. Other customer sales were unfavorably impacted by contractual price reductions and slight decreases in volume.

 

Operating Results

 

Operating loss decreased by $2.6 billion during 2007. Below is a summary of the variances in Delphi’s operating results for 2007 compared to 2006.

 

Gross Margin.  Gross margin increased to $1,217 million or 5.5% in 2007 compared to $771 million or 3.4% in 2006. Below is a summary of Delphi’s gross margin for this period.

 

 

The gross margin increase was primarily due to improvements in operational performance, as noted in the table above, as well as the following items:

 

 

 

Offsetting these increases was decreased volume, primarily attributable to an approximate 8% reduction in GM North America vehicle production, and employee termination benefits and other exit costs, as noted in the table above, as well as the following items:

 

 

U.S. Employee Workforce Transition Program Charges. Delphi recorded workforce transition program charges of approximately $212 million during 2007 for UAW-, IUE-CWA- and USW- represented employees. These charges included $60 million for attrition programs for the eligible union-represented U.S. hourly employees, which is net of a decrease in previously recorded charges due to a change in estimate of $48 million. The 2007 workforce transition program charge also includes $20 million of amortization expense related to buy-down payments for eligible traditional employees who did not elect an attrition or flowback option and continue to work for Delphi. The estimated payments to be made under the buy-down arrangements within the UAW and IUE-CWA Workforce Transition Programs totaled $323 million and were recorded as a wage asset and liability. Additionally, workforce transition program charges includes $132 million in net benefit plan curtailment charges during 2007. The curtailment losses were to recognize the effect of employees who elected to participate in the workforce transition programs, the effect of prospective plan amendments that will eliminate the accrual of future defined pension benefits for salaried and certain hourly employees on emergence from chapter 11, and the impact of certain divestitures. Refer to Note 15. U.S. Employee Workforce Transition Programs to the consolidated financial statements for more information.

 

Delphi recorded postretirement wage and benefit charges of approximately $2.7 billion during 2006 related to the workforce transition programs for UAW- and IUE-CWA-represented hourly employees. These charges included net pension and postretirement benefit curtailment charges of $1.8 billion offset by $45 million of a curtailment gain related to extended disability benefits, in U.S. workforce transition program charges as well as special termination benefit charges of approximately $0.9 billion. The curtailment charges are primarily due to reductions in anticipated future service as a result of the employees electing to participate in the program. The special termination benefit charges were for the pre-retirement and buyout portions of the cost of the workforce transition programs for UAW- and IUE-CWA-represented hourly employees who elected to participate.

 

Selling, General and Administrative Expenses. Selling general and administrative (“SG&A”) expenses were $1.6 billion, or 7.2% of total net sales for 2007 compared to $1.5 billion, or 6.5% of total net sales for 2006. The increase as a percentage of total net sales in 2007 was primarily due to an increase in foreign currency exchange impacts of $46 million, an increase in employee termination benefits and other exit costs of $31 million, and a $85 million increase in costs necessary to implement information technology systems to support finance, manufacturing and product development initiatives. Offsetting these increases, SG&A was favorably impacted by a reduction in Corporate and Other expense attributable to an 8% year-over-year headcount reduction in the U.S. in 2007.

Depreciation and Amortization. Depreciation and amortization was $914 million for 2007 compared to $954 million for 2006. The year-over-year decrease of $40 million primarily reflects the impact of certain assets that were impaired in 2006 and 2007, resulting in reduced 2007 depreciation and amortization expense, lower capital spending at impaired sites and the effect of accelerated depreciation on assets nearing the end of their program life in 2006 and 2007. Also contributing to reduced depreciation and amortization expense is a reduction in capital spending of approximately 7% versus 2006.

 

Long-Lived Asset Impairment Charges Long-lived asset impairment charges related to the valuation of long-lived assets held for use were recorded in the amounts of approximately $98 million and $172 million during 2007 and 2006, respectively. Delphi evaluates the recoverability of certain long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The 2007 and 2006 charges primarily relate to our Automotive Holdings Group segment. Refer to Note 9. Property, Net to the consolidated financial statements for more information.

 

Interest Expense. Interest expense for 2007 was $769 million compared to $427 million for 2006. The increase in interest expense was due to the recognition of $411 million of interest expense related to prepetition debt and allowed unsecured claims, which in accordance with the Amended Plan became probable of payment in 2007. This increase was partially offset by a decrease resulting from lower interest rates for the Refinanced DIP Credit Facility even though the overall debt outstanding for 2007 was higher as compared to 2006. Approximately $148 million of contractual interest expense related to outstanding debt, including debt subject to compromise, was not recognized in accordance with the provisions of SOP 90-7 in 2006. All contractual interest expense related to outstanding debt, including debt subject to compromise, was recognized in 2007.

 

Other Income and Expense. Other income for 2007 was $110 million as compared to other income of $40 million for 2006. In 2007, Delphi received $36 million from GM pursuant to an intellectual property license agreement. The remainder of the increase for 2007 was due to increased non-Debtor interest income associated with additional cash and cash equivalents on hand.

 

Reorganization Items. Bankruptcy-related reorganization expenses were $163 million and $92 million for 2007 and 2006, respectively. Delphi incurred professional fees, primarily legal, directly related to the reorganization of $169 million and $150 million during 2007 and 2006, respectively. These costs were partially offset by interest income of $11 million and $55 million from accumulated cash from the reorganization and $2 million and $3 million of gains on the settlement of prepetition liabilities during 2007 and 2006, respectively.

 

Income Taxes. We recorded an income tax benefit of $522 million for 2007 compared to income tax expense of $130 million for 2006. The change in the annual effective tax rate in 2007 was primarily due to the tax benefit of $703 million related to $1.9 billion U.S. pre-tax other comprehensive income related to employee benefits. We do not recognize income tax benefits on losses in continuing operations in our U.S. and certain other non-U.S. tax jurisdictions in excess of the $703 million credit included in other comprehensive income in the current year, due to a history of operating losses. We have determined that it is more likely than not that these tax benefits will not be realized. Refer to Note 8. Income Taxes to the consolidated financial statements.

 

Minority Interest. Minority interest was $63 million and $34 million for 2007 and 2006, respectively. Minority interest reflects the results of ongoing operations within Delphi’s consolidated investments.

 

Equity Income. Equity income was $27 million and $44 million for 2007 and 2006, respectively. Equity income reflects the results of ongoing operations within Delphi’s equity-method investments. The decrease in equity income during 2007 was primarily due to the operating results of PBR Knoxville and Promotora de Paretes Electricos, of which Delphi has minority ownership interests and are included in our Powertrain Systems segment and Electric/Electronic Architecture segment, respectively.

 

Loss from Discontinued Operations. Loss from discontinued operations was $757 million and $326 million for 2007 and 2006, respectively. Included in loss from discontinued operations for 2007 were charges of $595 million related to assets held for sale for the Steering and Interiors and Closures Businesses,

which include the impact of curtailment loss on pension benefits for impacted employees, long-lived asset impairment charges of $193 million, workforce transition program charges of $32 million and employee termination benefits and other exit costs of $132 million, primarily due to $107 million associated with the exit of the Puerto Real site in Cadiz, Spain (see Note 2. Transformation Plan and Chapter 11 Bankruptcy). The loss from discontinued operations for 2006 includes long-lived asset impairment charges of $43 million, workforce transition program charges of $249 million and employee termination benefits and other exit costs of $30 million.

 

Cumulative Effect of Accounting Change. Delphi recorded a $3 million cumulative effect of accounting change (net of tax) as a result of the adoption of SFAS 123 (Revised 2004), Share Based Payments, (“SFAS 123(R)”) during 2006.

 

Results of Operations by Segment

 

Electronics and Safety

 

The Electronics and Safety segment, which includes audio, entertainment and communications, safety systems, body controls and security systems, displays, mechatronics and power electronics, as well as advanced development of software and silicon, had sales and operating results for the years ended December 31, 2007 and 2006 as follows:

 

 

Net Sales Total sales for 2007 decreased $58 million from 2006 primarily due to lower volume of $161 million and contractual price reductions of $117 million. These decreases were partially offset by the favorable fluctuations in foreign currency exchange rates of $151 million, primarily due to movements in the Euro and Korean Won, and $70 million due to design changes.

 

The GM sales increase for 2007 as compared to 2006 was primarily due to design changes of $74 million and a favorable impact from foreign currency exchange rates of $25 million, primarily related to the Euro. These increases were offset by a decline in GM North America volume of $64 million, as well as contractual price reductions.

 

The other customers and inter-segment sales decreased for 2007 as compared to 2006 primarily due to decreased volume of $97 million as well as contractual price reductions. Other customer and inter-segment sales were favorably impacted by foreign currency exchange rates of $125 million primarily related to the Euro and the Korean Won.

 

Operating Income/Loss The decreased operating income for 2007 as compared to 2006 was impacted by contractual price reductions of $117 million, a reduction in volume of $64 million, increased warranty expense of $30 million primarily due to the instrument clusters product line, increased expenses related to rationalization of manufacturing capacity of $22 million, employee termination benefits and other exit costs of $18 million, and a $7 million gain on the sale of MobileAria assets in 2006. Operating income in 2007 was

also negatively impacted by employee benefit plan settlements in Mexico of $32 million. Offsetting these decreases were operational performance improvements, primarily related to material and manufacturing, of $137 million, and favorable foreign currency exchange impacts of $41 million.

 

Powertrain Systems

 

The Powertrain Systems segment, which includes extensive systems integration expertise in gasoline, diesel and fuel handling and full end-to-end systems including fuel injection, combustion, electronics controls, exhaust handling, and test and validation capabilities, had sales and operating results for the years ended December 31, 2007 and 2006 as follows:

 

 

Net Sales Total sales for 2007 increased by $98 million from 2006 primarily due to the favorable impact of foreign currency exchange rates of $193 million, related to the Brazilian Real, Chinese Renminbi and Euro, as well as commodity pass-through of $179 million. Offsetting these increases were decreased volume of $162 million, contractual price reductions of $101 million and reductions due to design changes.

 

The GM sales decrease for 2007 as compared to 2006 was primarily due to a decline in GM volume of $201 million, as well as contractual price reductions. Offsetting these sales decreases was the favorable impact from currency exchange rates of $24 million, primarily the Brazilian Real, and commodity pass-through of $17 million.

 

The increase in other customers and inter-segment sales for 2007 as compared to 2006 was due to favorable impacts of $169 million from currency exchange rates, primarily driven by the Euro, Brazilian Real and Chinese Renminbi, as well as commodity pass-through of $162 million, and increases in volume of $40 million, primarily in Europe and Asia Pacific. These increases were offset by unfavorable impacts due to contractual price reductions.

 

Operating Income/Loss The increase in operating loss for 2007 as compared to 2006 was primarily attributable to reductions in volume of $177 million, contractual price reductions of $101 million, an increase in warranty reserves of $66 million and a $30 million loss as a result of the sale of the Catalyst business in 2007. Additionally, Powertrain recorded $26 million related to the rationalization of manufacturing capacity during 2007. Offsetting these decreases were improvements related to operating performance of $231 million, and reduced costs of $22 million related to temporarily idled U.S. hourly workers who received nearly full pay and benefits as a result of the U.S. workforce transition program.

Electrical/Electronic Architecture

 

The Electrical/Electronic Architecture segment, which includes complete electrical architecture and component products, had sales and operating results for the years ended December 31, 2007 and 2006 as follows: