UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

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)

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o.     No o.

 

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):

 

Large accelerated filer o.  Accelerated filer o.  Non-accelerated filer o.  Smaller reporting company þ.

 

(Do not check if a smaller reporting company)

 

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 30, 2009 there were 564,637,307 outstanding shares of the registrant’s $0.01 par value common stock.

 

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

 

 

DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

 

See notes to consolidated financial statements.

DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS

 

 

See notes to consolidated financial statements.

DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

See notes to consolidated financial statements.

DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

 

 

 

 

See notes to consolidated financial statements.

DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) (Unaudited)

 

 

See notes to consolidated financial statements.

DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

General — Delphi Corporation, together with its subsidiaries and affiliates (“Delphi” or the “Company”), is a supplier of vehicle electronics, transportation components, integrated systems and modules, and other electronic technology. Delphi’s largest customer is General Motors Company, formerly General Motors Corporation (“GM”), and North America and Europe are its largest markets. Delphi is continuing to diversify its customer base and geographic markets. The consolidated financial statements and notes thereto included in this report should be read in conjunction with Delphi’s consolidated financial statements and notes thereto included in Delphi’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”).

 

Consolidation — The consolidated financial statements include the accounts of Delphi and domestic and non-U.S. subsidiaries in which Delphi holds a controlling financial or management interest and variable interest entities of which Delphi has determined that it is the primary beneficiary. Delphi’s share of the earnings or losses of non-controlled affiliates, over which Delphi exercises significant influence (generally a 20% to 50% ownership interest), is included in the consolidated operating results using the equity method of accounting. All significant intercompany transactions and balances between consolidated Delphi businesses have been eliminated. All adjustments, consisting of only normal recurring items, which are necessary for a fair presentation, have been included. The results for interim periods are not necessarily indicative of results that may be expected from any other interim period or for the full year and may not necessarily reflect the consolidated results of operations, financial position and cash flows of Delphi in the future.

 

Restricted Cash — At June 30, 2009 and December 31, 2008, Delphi had $327 million and $403 million in restricted cash, respectively, primarily related to cash collateral as required under its debtor-in-possession credit facility. Refer to Note 10. Debt for additional information. Additionally, restricted cash includes cash for use for the pre-retirement portion of the U.S. employee workforce transition programs, refer to Note 11. U.S. Employee Workforce Transition Programs, and balances on deposit at financial institutions that have issued letters of credit in favor of Delphi.

 

Bankruptcy Filing — 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”). The reorganization cases are being jointly administered under the caption “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 and orders of the Court. Delphi’s non-U.S. subsidiaries were not included in the Chapter 11 Filings, continue their business operations without supervision from the Court and are not subject to the requirements of the Bankruptcy Code. However, Delphi’s Board of Directors authorized Delphi’s indirect wholly-owned Spanish subsidiary, Delphi Automotive Systems España, S.L. (“DASE”), to file a petition for Concurso, or bankruptcy, under Spanish law, in March 2007 exclusively for that entity.

 

American Institute of Certified Public Accountants Statement of Position 90-7 (“SOP 90-7”), Financial Reporting by Entities in Reorganization under the Bankruptcy Code, which is applicable to companies in chapter 11 of the Bankruptcy Code, generally does not change the manner in which financial statements are prepared. However, it does require, among other disclosures, that the financial statements for periods subsequent to the filing of the chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and

restructuring of the business must be reported separately as reorganization items in the statements of operations. The balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise and from postpetition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. In addition, reorganization items must be disclosed separately in the statement of cash flows. Delphi adopted SOP 90-7 effective October 8, 2005 and has segregated those items as outlined above for all reporting periods subsequent to such date.

 

Going Concern — The Debtors are operating pursuant to chapter 11 of the Bankruptcy Code and continuation of the Company as a going concern is contingent upon, among other things, the Debtors’ ability to (i) comply with the terms and conditions of their debtor-in-possession (“DIP”) financing agreement and related accommodation agreement (as amended, the “Accommodation Agreement”) as well as the liquidity support agreement with GM (the “GM Advance Agreement”), refer to Note 10. Debt and Note 21. Subsequent Events for more information regarding the terms; (ii) reduce wage and benefit costs and liabilities during the bankruptcy process; (iii) return to profitability; (iv) generate sufficient cash flow from operations; and (v) consummate the transactions under the Modified Plan (as defined below) of which the master disposition agreement, MDA (as defined in Note 2. Transformation Plan and Chapter 11 Bankruptcy) is an exhibit, including the sale of substantially all of its core business to GM, the lenders under the DIP and their affiliates, who will then operate such businesses going forward and the maintenance of sufficient liquidity to wind down, sell or otherwise dispose of the retained assets in an orderly fashion.

 

Delphi is in default of the terms of the DIP financing agreement (the “Amended and Restated DIP Credit Facility”) and as a result, Delphi is no longer able to make additional draws under the facility after December 12, 2008 (the effective date of the Accommodation Agreement). Under the Accommodation Agreement, the lenders under the Amended and Restated DIP Credit Facility have agreed, among other things, to allow Delphi to continue using the proceeds of such facility and to forbear from the exercise of certain default-related remedies, in each case until August 13, 2009, subject to continued compliance with the provisions of the Amended and Restated DIP Credit Facility (as amended and modified by the Accommodation Agreement, as amended). To date, Delphi has been successful in obtaining short-term extensions to the termination date of the Accommodation Agreement and will continue to seek such extensions until such time as the Modified Plan (as defined below) is effective, however, there can be no assurances that it will continue to be successful in obtaining such extensions as needed. The covenants include being able to timely meet the conditions to closing and effectuate the transactions outlined in the revised Modified Plan of which the MDA is an exhibit. There can be no assurance that Delphi will continue to comply with the terms and conditions of the Amended and Restated DIP Credit Facility (as amended and modified by the Accommodation Agreement). These matters create substantial uncertainty relating to the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability of assets and classification of liabilities that might result from the outcome of these uncertainties. The Court, on July 30, 2009 (the “Modification Approval Date”) confirmed Delphi’s modified plan of reorganization, as originally confirmed by the Court, on January 25, 2008, and as subsequently modified through the Modification Approval Date (the “Modified Plan”). The Modified Plan provides for no distribution to holders of the Company’s common stock and a contingent pro rata distribution to holders of allowed general unsecured claims in an amount not to exceed $300 million. Refer to the Plan of Reorganization in Note 2. Transformation Plan and Chapter 11 Bankruptcy and Note 21. Subsequent Events, for more information. Pending consummation of the Modified Plan, Delphi and certain of its U.S. subsidiaries will continue as “debtors-in-possession” in chapter 11. There can be no assurances as to when Delphi will consummate the Modified Plan or other consensual resolution of Delphi’s chapter 11 cases. Consummation of a confirmed plan of reorganization often materially changes the amounts reported in a company’s consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of consummation of a confirmed plan of reorganization. Upon consummation of the Modified Plan, all of Delphi’s outstanding common stock will be cancelled and Delphi’s stock will be delisted from the Pink Sheets, LLC, a quotation service for over the counter securities and Delphi will no longer be a publicly held corporation.

Contractual Interest Expense and Interest Expense on Unsecured Claims — Contractual interest expense represents amounts due under the contractual terms of outstanding debt, including debt subject to compromise for which interest expense is not recognized in accordance with the provisions of SOP 90-7. Contractual interest expense for the three and six months ended June 30, 2009 was $193 million and $361 million, respectively, and for the three and six months ended June 30, 2008 was $150 million and $279 million, respectively. In September 2007, Delphi began recording prior contractual interest expense related to certain prepetition debt because it became probable that the interest would become an allowed claim based on the provisions of the plan of reorganization filed with the Court in September 2007 and confirmed, as amended, on January 25, 2008. The plan of reorganization confirmed on January 25, 2008 also provided that certain holders of allowed unsecured claims against Delphi would be paid postpetition interest on their claims, calculated at the contractual non-default rate from the petition date through January 25, 2008, when the Company ceased accruing interest on these claims. Delphi recorded interest related to prepetition debt and allowed unsecured claims of $7 million during the six months ended June 30, 2008 (net of $7 million reduction recognized during the quarter ended June 30, 2008 due to changes in estimates of certain prepetition claim amounts). At June 30, 2009 and December 31, 2008, Delphi had accrued interest of $415 million in accrued liabilities in the accompanying balance sheet for prepetition claims. As discussed in Note 2. Transformation Plan and Chapter 11 Bankruptcy, on July 30, 2009, the Court confirmed Delphi’s Modified Plan, which upon its effectiveness, would eliminate postpetition interest on prepetition debt and allowed unsecured claims. Therefore, Delphi anticipates that it will be relieved of this liability and anticipates reversing such liability in the third quarter of 2009.

 

Use of Estimates — Preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires Delphi to make estimates and assumptions that affect amounts reported therein. During the six months ended June 30, 2009, there were no material changes in the methods or policies used to establish accounting estimates. Generally, matters subject to Delphi’s estimation and judgment include amounts related to accounts receivable realization, inventory obsolescence, asset impairments, useful lives of intangible and fixed assets, deferred tax asset valuation allowances, income taxes, pension and other postretirement benefit plan assumptions, accruals related to litigation, warranty costs, environmental remediation costs, workers’ compensation accruals and healthcare accruals. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates.

 

Discontinued Operations — In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS 144”), a business component that is disposed of or classified as held for sale is reported as discontinued operations if the cash flows of the component have been or will be eliminated from the ongoing operations of the Company and the Company will no longer have any significant continuing involvement in the business component. The results of discontinued operations are aggregated and presented separately in the consolidated statements of operations and consolidated statements of cash flows. Assets and liabilities of the discontinued operations are aggregated and reported separately as assets and liabilities held for sale in the consolidated balance sheet. SFAS 144 requires the reclassification of amounts presented for prior years to effect their classification as discontinued operations.

 

Amounts have been derived from the consolidated financial statements and accounting records of Delphi using the historical basis of assets and liabilities held for sale and historical results of operations related to Delphi’s global steering and halfshaft businesses (the “Steering Business”), its interiors and closures product line (the “Interiors and Closures Business”) and various non-core product lines and plant sites that do not fit Delphi’s future strategic framework (the “Automotive Holdings Group”). While the historical results of operations of the Steering Business, the Interiors and Closures Business and the Automotive Holdings Group include general corporate allocations of certain functions historically provided by Delphi, such as accounting, treasury, tax, human resources, facility maintenance, and other services, no amounts for these general corporate retained functions have been allocated to discontinued operations in the statements of operations. Certain employee pension and other postretirement benefit liabilities for the Steering Business were not allocated to liabilities held for sale in the balance sheets. Expenses related to the service cost of employee

pension and other postretirement benefit plans were allocated to discontinued operations in the statements of operations. Allocations have been made based upon a reasonable allocation method. Refer to Note 17. Discontinued Operations for more information.

 

Recently Issued Accounting Pronouncements — In December 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 160 (“SFAS 160”), Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51. SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Delphi adopted SFAS 160 as of January 1, 2009 and the accompanying financial statements reflect the provisions of SFAS 160 for all periods presented.

 

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS 161”), Disclosures about Derivative Instruments and Hedging Activities — an Amendment of FASB Statement 133. SFAS 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”); and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2008. Delphi adopted SFAS 161 as of January 1, 2009. The adoption of SFAS 161 did not have a significant impact on Delphi’s financial statements other than providing the new disclosures required by SFAS 161.

 

In December 2008, the FASB issued FASB Staff Position 132(R)-1 (FSP 132(R)-1), Employers’ Disclosures about Postretirement Benefit Plan Assets. FSP 132(R)-1 provides guidance on disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP 132(R)-1 and the enhanced disclosures about plan assets are required for fiscal years ending after December 15, 2009. Earlier application is permitted. Delphi is currently assessing the impact FSP 132(R)-1 may have on its financial statements.

 

In April 2009, the FASB issued FASB Staff Position No. 157-4 (“FSP 157-4”), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. The adoption of FSP 157-4 during the second quarter of 2009 did not have a significant impact on Delphi’s financial statements.

 

In April 2009, the FASB issued FASB Staff Position Nos. 115-2 and 124-2 (“FSP FAS 115-2 and FAS 124-2”), Recognition and Presentation of Other-Than-Temporary Impairments. The adoption of FSP FAS 115-2 and FAS 124-2 during the second quarter of 2009 did not have a significant impact on Delphi’s financial statements.

 

In April 2009, the FASB issued FASB Staff Position No. 107-1 and Accounting Principles Board Opinion 28-1 (“FSP FAS 107-1 and APB 28-1”), Interim Disclosures about Fair Value of Financial Instruments. The adoption of FSP FAS 107-1 and APB 28-1 during the second quarter of 2009 did not have a significant impact on Delphi’s financial statements other than providing the new required disclosures. Under FSP FAS 107-1 and APB 28-1, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Refer to Note 16. Financial Instruments, Derivatives and Hedging Activities and Fair Value Measurements for the disclosures required by FSP FAS 107-1 and APB 28-1.

 

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165 (“SFAS 165”), Subsequent Events. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Delphi adopted SFAS 165 for the quarter ended June 30, 2009. The adoption of SFAS 165 did not have a significant impact on Delphi’s financial statements.

 

In June 2009, the FASB issued Financial Accounting Standards No. 166 (“SFAS 166”), Accounting for Transfers of Financial Assets, and Financial Accounting Standards No. 167 (“SFAS 167”), Amendments to FASB Interpretation No. 46(R). SFAS 166 and SFAS 167 change the way entities account for securitizations

and special-purpose entities. SFAS 166 and SFAS 167 will be effective for fiscal years beginning after November 15, 2009. Delphi is currently evaluating the requirements of SFAS 166 and SFAS 167, and has not yet determined the impact on its financial statements.

 

In June 2009, the FASB issued Financial Accounting Standards No. 168 (“SFAS 168”), The “FASB Accounting Standards Codification^tm” and the Hierarchy of Generally Accepted Accounting Principles. SFAS 168 establishes the FASB Accounting Standards Codification^tm (the “Codification”) to become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. Delphi does not expect the adoption of FAS 168 to have a significant impact on Delphi’s financial statements other than updating references from financial accounting standards to the Codification.

 

The adoption of the following accounting pronouncements as of January 1, 2009 did not have a significant impact on Delphi’s financial statements:

 

 

Refer to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 for further information on these accounting pronouncements.

 

 

Plan of Reorganization and Transformation Plan

 

Elements of 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 outlined 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 Delphi’s product portfolio and make the necessary manufacturing alignment with its new focus, transform Delphi’s cost structure and resolve its pension funding situation. On February 4, 2008, the Confirmation Order entered by the Court on January 25, 2008 with respect to Delphi’s Plan and Disclosure Statement became final. Under the terms and subject to the conditions of the Equity Purchase and Commitment Agreement 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”), Merrill Lynch, Pierce, Fenner & Smith, Incorporated (“Merrill”), UBS Securities LLC (“UBS”), and Goldman Sachs & Co. (“Goldman”) (collectively the “Investors”), dated as of August 3, 2007, as amended (and together with all schedules and exhibits thereto, the “EPCA”), the Investors committed to purchase $800 million of convertible preferred stock and approximately $175 million of common stock in the reorganized Company. Additionally, subject to satisfaction of other terms and conditions, the Investors committed to purchase any unsubscribed shares of common stock in connection with an approximately $1.6 billion rights offering that was made available to unsecured creditors. On April 4, 2008, Delphi announced that although it had met the conditions required to substantially consummate its Plan, including obtaining $6.1 billion of exit financing, the Investors refused to participate in a closing that was commenced but not completed on that date. Several hours prior to the scheduled closing on April 4, 2008, Appaloosa delivered to Delphi a letter, stating that such letter “constitutes a notice of immediate termination” of the EPCA. Appaloosa’s April 4 letter alleged that Delphi had breached certain provisions of the EPCA and that Appaloosa is entitled to terminate the EPCA. At the time Appaloosa delivered its letter, other than the Investors, all the required parties for a successful closing and emergence from chapter 11, including representatives of Delphi’s exit financing lenders, GM, and the Official Committee of Unsecured Creditors

(the “Creditors’ Committee”) and the Official Committee of Equity Security Holders (the “Equity Committee”) in Delphi’s chapter 11 cases were present, were prepared to move forward, and all actions necessary to consummate the plan of reorganization were taken other than the concurrent closing and funding of the EPCA. Delphi believes that Appaloosa wrongfully terminated the EPCA and disputes the allegations that Delphi breached the EPCA or failed to satisfy any condition to the Investors’ obligations thereunder as asserted by Appaloosa in its April 4 letter.

 

Throughout the second and third quarters of 2008, Delphi engaged in discussions with its stakeholders, including GM and representatives of both statutory committees, to develop modifications to the Plan that would allow Delphi to emerge from chapter 11. On October 3, 2008, Delphi filed proposed modifications to the Plan and related modifications to the Disclosure Statement with the Court which contained an updated business plan associated with a mid-point total enterprise business valuation of $7.2 billion, and contemplated that Delphi would need to raise approximately $3.75 billion of emergence capital through a combination of term debt and rights to purchase equity. However, after the filing of the proposed modifications, substantial uncertainty and a significant decline in capacity in the credit markets, the global economic downturn generally and the current economic climate in the automotive industry adversely impacted Delphi’s ability to develop a revised recapitalization plan and successfully consummate a confirmed plan of reorganization or other consensual resolution of Delphi’s chapter 11 cases. Delphi continued comprehensive discussions with all of its stakeholders that have a continuing economic interest in its reorganization cases to formulate further plan modifications. In connection with those discussions, Delphi made further revisions to its business plan consistent with the extremely low volume production environment in the global automotive industry and depressed global capital and equity markets. On June 1, 2009, Delphi filed further proposed modifications to the Plan and related modifications to the Disclosure Statement, which set forth the Company’s plans to effect its emergence from chapter 11 reorganization through either a modified reorganization plan or sale under section 363 of the Bankruptcy Code pursuant to which Parnassus Holdings, LLC, an affiliate of Platinum Equity LLC (“Parnassus”), and GM Components Holdings, LLC (“GM Components”), an affiliate of GM, would operate Delphi’s U.S. and non-U.S. businesses going forward with emergence capital and capital commitments of approximately $3.6 billion and without the legacy costs associated with the North American sites to be acquired by GM Components together with Delphi’s Steering Business. Certain other residual non-core and non-strategic assets and liabilities were to remain with the Company and were expected to be divested over time.

 

On June 16, 2009 the Court entered an order (the “Solicitation Order”) approving, among other things, procedures with respect to soliciting votes on modifications to Delphi’s previously confirmed First Amended Plan of Reorganization (as modified) (the “Modified Plan”) and related disclosures and set a final hearing date to consider the proposed modifications. The Solicitation Order authorized and directed Delphi to solicit votes to accept or reject the plan as modified in accordance with specified procedures and also provided for the creation of a process through which other potential buyers could submit a binding offer for the Company. The deadline for submission by qualified bidders of potential alternative transactions to the transaction announced on June 1, 2009 with Parnassus and GM Components passed without the submission of any potential alternative transactions from any of the three third-party bidders qualified under supplemental procedures previously approved by the Court, but the Company did receive a timely pure credit bid notice from JPMorgan Chase Bank, N.A. (the “Administrative Agent”), in its capacity as administrative agent under the Amended and Restated DIP Credit Facility on behalf of the lenders under that facility (the “DIP Lenders”).

 

On July 27, 2009, following a two-day auction process, Delphi’s Board of Directors, following consultation with Delphi’s official committee of unsecured creditors and its largest U.S.-based union, designated the pure credit bid received from the Administrative Agent on behalf of the DIP Lenders as the “Successful Bid.” Delphi also reached agreements with its official unsecured creditors’ committee and Wilmington Trust Corporation, the indenture trustee for several series of unsecured notes, to withdraw their objections to, and support, the Modified Plan, whether based on the transaction involving Parnassus and GM or the pure credit bid submitted by the Administrative Agent on behalf of Delphi’s DIP Lenders. On July 30, 2009, the Court confirmed Delphi’s Modified Plan, which incorporated the master disposition agreement (including all schedules and exhibits thereto, the “MDA”) among Delphi on behalf of itself and

other affiliated entities, GM, Motors Liquidation Company (“Old GM”), and DIP Holdco 3, LLC (“DIP Holdco”) on behalf of itself and other affiliated buyers (the “DIP Buyers,” together with the GM Buyers, the “Buyers”), for the sale and purchase of substantially all of Delphi’s and its subsidiaries’ businesses. Refer to Note 21. Subsequent Events for the terms of the MDA.

 

GM — Conclude negotiations with GM to finalize financial support for certain of Delphi’s 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 the Global Settlement Agreement, as amended (the “GSA”), and the Master Restructuring Agreement, as amended (the “MRA”). The GSA and the MRA, as amended through January 25, 2008, comprised part of the Plan and were approved in the order confirming the Plan on January 25, 2008. The GSA and the MRA provided that such agreements were not effective until and unless Delphi emerged from chapter 11. However, as part of Delphi’s overall negotiations with its stakeholders to further amend the Plan and emerge from chapter 11 as soon as practicable, Delphi agreed with GM and filed further amendments to the GSA and MRA (the “Amended MRA”) with the Court on September 12, 2008 and subsequently entered into an additional amendment to the GSA as of September 25, 2008 (as so amended, the “Amended GSA”). On September 26, 2008, Delphi received the consent of its labor unions to implement certain aspects of the agreements as described in more detail below. The Court approved such amendments on September 26, 2008 and the Amended GSA and Amended MRA became effective on September 29, 2008. These amended agreements include provisions related to the transfer of certain legacy pension and other postretirement benefit obligations and became effective independent of and effective in advance of substantial consummation of an amended plan of reorganization. The effectiveness of these agreements resulted in a material reduction in Delphi’s liabilities and future expenses related to U.S. hourly workforce benefit programs. If the Modified Plan becomes effective, it is anticipated that, except as set forth in the MDA, the MRA will be terminated and the MDA and certain ancillary agreements will govern the relationship among (i) GM, (ii) reorganized Delphi, and (iii) DIP Holdco, as purchaser of substantially all of Delphi’s and its subsidiaries’ businesses.

 

Global Settlement Agreement — The Amended GSA resolved outstanding issues between Delphi and GM, 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, including certain post-separation claims and disputes; the proofs of claim filed by GM against Delphi in Delphi’s chapter 11 cases; GM’s treatment under a Delphi plan of reorganization; and various other legacy U.S. hourly workforce benefit issues. Except for the second step of the transfer of a substantial portion of the assets and liabilities under the Delphi Hourly-Rate Employees Pension Plan (the “Hourly Plan”) as specifically noted below, the obligations under the Amended GSA were not conditioned on the effectiveness of an amended plan of reorganization.

 

The Amended GSA addresses commitments by Delphi and GM regarding other U.S. hourly workforce postretirement health care benefits and employer-paid postretirement basic life insurance benefits (“OPEB”), pension obligations, and other GM contributions with respect to labor matters and releases.

 

Hourly Pension Plan Settlement — First Pension Transfer to GM — On September 26, 2008, Delphi received the consent of its labor unions and approval from the Court to transfer certain assets and liabilities of the Hourly Plan to the GM Hourly-Rate Employees Pension Plan pursuant to section 414(l) of the Internal Revenue Code (the “414(l) Net Liability Transfer”). Pursuant to the Amended GSA, the 414(l) Net Liability Transfer was to occur in two separate steps with the first step sufficient to avoid an Hourly Plan accumulated funding deficiency for the plan year ended September 30, 2008. The first step occurred on September 29, 2008 and Delphi transferred liabilities of approximately $2.6 billion and assets of approximately $0.5 billion from the Hourly Plan to the GM Hourly-Rate Employees Pension Plan, representing 30% and 10% of the projected benefit obligation and plan assets, respectively, as of September 29, 2008 (the “First Pension Transfer”). The First Pension Transfer was accounted for as a settlement under Statement of Financial Accounting Standards No. 88, Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefit (“SFAS 88”) in the third quarter of 2008, and the obligations of the Hourly Plan were remeasured prior to the transfer occurring.

Hourly Pension Plan Settlement — Second Pension Transfer to GM — The second step of the 414(l) Net Liability Transfer (the “Second Pension Transfer”) was to occur upon the effectiveness of an amended plan of reorganization. In July 2009, GM advised Delphi that it would not assume the Hourly Plan and would not complete the Second Pension Transfer. GM and the Pension Benefit Guaranty Corporation (the “PBGC”) negotiated a separate release and waiver agreement regarding a possible initiation by the PBGC of the plan termination process for Delphi’s Hourly Plan and provides consideration to the PBGC for certain releases to be granted to, among others, GM, Delphi, and Delphi’s global affiliates. On July 22, 2009, the PBGC initiated the process to terminate Delphi’s Hourly Plan and the U.S. salaried and subsidiary pension plans. For additional information regarding the termination of Delphi’s Hourly Plan, refer to Note 21. Subsequent Events.

 

Hourly Plan Freeze and Triggering of Benefit Guarantees — As provided for under certain union settlement agreements and implementation agreements, Delphi froze its Hourly Plan for future benefit accruals as of November 30, 2008. In addition, as a result of the triggering of the benefit guarantees, certain eligible hourly employees will receive up to seven years of credited service under the pension and OPEB plans sponsored by GM. The remaining assets and liabilities of the Hourly Plan will no longer be the responsibility of Delphi. Moreover, GM advised that it would not assume the Hourly Plan and would not complete the Second Pension Transfer.

 

Hourly OPEB Settlement and OPEB Reimbursement from GM — On September 23, 2008, Delphi received approval from the Court and on September 26, 2008 received the consent of its labor unions to cease providing traditional U.S. hourly OPEB. In addition, upon effectiveness of the Amended GSA, GM assumed financial responsibility for all Delphi traditional hourly OPEB liabilities from and after January 1, 2007. GM assumed approximately $6.8 billion of postretirement benefit liabilities for certain of the Company’s active and retired hourly employees. The assumption of the traditional hourly OPEB liability by GM and GM’s agreement to reimburse postretirement benefit expenses through the administrative transfer date of February 1, 2009 was accounted for as a settlement under Statement of Financial Accounting Standards No. 106, Employer’s Accounting for Postretirement Benefits Other Than Pensions, in the third quarter of 2008. During the three and six months ended June 30, 2009, GM funded an additional $3 million and $28 million, respectively, of OPEB payments made to the hourly workforce. An additional $13 million and $32 million were recorded as a receivable from GM during the three and six months ended June 30, 2009 respectively. As of June 30, 2009, $13 million is recorded as a receivable from GM. Refer to Note 12. Pensions and Other Postretirement Benefits for further information.

 

Allowed GM Administrative and General Unsecured Claims — In connection with the 414(l) Net Liability Transfer, GM was to receive an allowed administrative claim in the amount of up to $2.1 billion, to be provided in two steps. Upon completion of the First Pension Transfer on September 29, 2008, GM received a claim equivalent to 77.5% of the net unfunded liabilities transferred, or $1.6 billion. Upon completion of the Second Pension Transfer, which was to occur upon the effectiveness of an amended plan of reorganization that satisfied the requirements of the Amended GSA, GM was to receive the balance of the $2.1 billion claim. Of the $2.1 billion administrative claim, $1.6 billion was recognized and included in the reorganization gain in the third quarter of 2008 and $427 million was to be granted and recognized by Delphi when the remaining assets and liabilities allocable to certain participants of the Hourly Plan included in the 414(l) Net Liability Transfer were transferred to the GM Hourly-Rate Employees Pension Plan. GM advised that it would not assume the Hourly Plan and would not complete the Second Pension Transfer.

 

With respect to GM’s claims in the Company’s chapter 11 cases, GM under the Amended GSA had agreed to a general unsecured claim of $2.5 billion, primarily for OPEB and special attrition programs for the U.S. hourly workforce, and to subordinate its recovery on such claim until other general unsecured creditors (other than holders of claims arising from Delphi’s trust preferred securities) had achieved a recovery of 20% of the allowed amount of their claims. Once Delphi’s other general unsecured creditors had received a distribution of 20% of the allowed amount of their claims, if there was any remaining value to be distributed, GM would have received a distribution on its general unsecured claim until it had received a 20% distribution on such claim amount. Once GM had received a 20% distribution on its general unsecured claim, and if there was any remaining value to be distributed, any additional distributions were to be shared ratably between GM and Delphi’s other general unsecured creditors.

Under the Modified Plan and the MDA, GM has agreed to waive its general unsecured claim in the Company’s chapter 11 cases. GM and certain related parties and Delphi and certain related parties have exchanged broad, global releases, effective as of the effective date of the Amended GSA (which releases do not apply to certain surviving claims as set forth in the Amended GSA). In addition to providing a release to GM, the Company agreed to withdraw with prejudice the sealed complaint (the “GM Complaint”) filed against GM in the Court on October 5, 2007. In addition, the Modified Plan contains additional mutual releases between GM and the Company.

 

Allowed IUE-CWA and USW Claims — General unsecured claims in the amounts of $126 million and $3 million were granted to the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers-Communication Workers of America (“IUE-CWA”) and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union and its Local Union 87L (the “USW”), respectively, under the respective labor settlement agreements.

 

Special Attrition Programs — Previously recognized GM general unsecured claims of $333 million primarily related to the 2006 U.S. hourly workforce attrition programs previously reimbursed by GM have been forgiven and subsumed in the overall $2.5 billion allowed general unsecured claim granted to GM, as discussed above. As of June 30, 2009 and December 31, 2008, Delphi’s receivable from GM related to the funding of the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) buydown arrangements under the 2007 U.S. hourly workforce special attrition programs was $52 million and $68 million, respectively. Refer to Note 11. U.S. Employee Workforce Transition Programs for more information.

 

Master Restructuring Agreement — The Amended MRA was intended to govern certain aspects of Delphi and GM’s commercial relationship since filing for chapter 11 and following Delphi’s emergence from chapter 11. The Amended MRA addresses the scope of GM’s existing and future business awards to Delphi and related pricing and sourcing arrangements, GM commitments with respect to reimbursement of specified ongoing U.S. hourly workforce labor costs, the disposition of certain Delphi facilities, and the treatment of existing commercial agreements between Delphi and GM. The obligations under the Amended MRA generally are not conditioned on the effectiveness of a modified plan of reorganization. GM’s obligations under the Amended MRA are not subject to termination until December 31, 2015 (provided that certain obligations of GM with respect to legacy UAW employees would survive any such termination). The MDA, which was approved by the Court as part of the Modified Plan, will supersede the Amended MRA, and the Amended MRA will be terminated (except as set forth in the MDA).

 

Existing and Future Business Awards and Related Matters — The Amended MRA (1) addresses the scope of existing business awards, related pricing agreements, and extensions of certain existing supply agreements, including GM’s ability to move production to alternative suppliers, and reorganized Delphi’s rights to bid and qualify for new business awards; (2) eliminates the requirement to implement price-downs with respect to certain businesses since Delphi filed for chapter 11 and restricts GM’s ability to re-source products manufactured at core U.S. operations through at least December 31, 2011 and Mexican operations through December 31, 2010; (3) contains a commitment by GM to provide Delphi with an annual Keep Site Facilitation Fee of $110 million in 2009 and 2010 which is not contingent on Delphi’s emergence from chapter 11, payable in quarterly installments during these periods, which, consistent with Delphi’s policy, will be recognized in earnings over future production periods; and (4) contains commitments by GM concerning the sale of certain of Delphi’s non-core businesses and additional commitments by GM if certain of Delphi’s businesses and facilities are not sold or wound down by specified future dates. On March 31, 2009 and June 30, 2009, Delphi received quarterly installments of the annual Keep Site Facilitation Fee of $27.5 million, of which approximately $21 million and $46 million were recorded as revenue in the three and six months ended June 30, 2009, respectively, and approximately $9 million remains recorded as a deferred liability at June 30, 2009.

 

Reimbursement of Hourly Labor Costs — GM has agreed to reimburse the Company for hourly workforce labor costs in excess of $26 per hour, excluding certain costs, including hourly pension and OPEB contributions provided under the supplemental wage agreement, at specified UAW manufacturing facilities

retained by Delphi. The economic substance of this provision of the Amended MRA is to lower Delphi’s labor costs at specified UAW-represented manufacturing facilities to $26 per hour, excluding certain costs, in order to maintain competitive operations in the U.S. Consistent with the economic substance of this provision, the labor subsidy amounts received by Delphi are recorded as a reduction of cost of sales in the period receivable from GM. During the three and six months ended June 30, 2009, Delphi received $37 million and $75 million, respectively, of reimbursement from GM of hourly labor costs in excess of $26 per hour. Delphi recorded $36 million and $74 million as a reduction to cost of sales during the three and six months ended June 30, 2009, respectively. As of June 30, 2009, $21 million is recorded as receivable from GM.

 

Production Cash Burn Breakeven Reimbursement — Delphi has agreed to continue manufacturing at certain non-core sites to meet GM’s production requirements and GM is providing operating cash flow breakeven support, or production cash burn breakeven (“PCBB”), from January 1, 2008 through site-specified time periods to compensate Delphi for keeping these sites in production. Additionally, GM has agreed to reimburse capital spending in excess of $500,000 at the PCBB sites from January 1, 2008 through site-specified time periods. PCBB reimbursement, including capital spending, from GM is recognized contemporaneously as incurred, and is treated as a reduction to cost of sales, fixed assets or discontinued operations, as appropriate. During the three and six months ended June 30, 2009, Delphi received $47 million and $103 million, respectively, of PCBB reimbursement from GM. Delphi recorded $27 million and $106 million in income from discontinued operations during the three and six months ended June 30, 2009, respectively. An additional $3 million and $4 million were recorded as a reduction to cost of sales during the three and six months ended June 30, 2009, respectively. As of June 30, 2009, $49 million is recorded as receivable from GM.

 

Working Capital Backstop — Steering Business — GM agreed to provide payments to Delphi for the Steering Business if the sales value is less than defined estimated working capital amounts of the businesses. In addition, GM agreed to provide payments to Delphi related to the Steering Business if it is not sold prior to the effectiveness of the MRA. GM provided a $210 million advance on working capital recovery to Delphi related to the Steering Business on September 30, 2008. As part of the MDA, an affiliate of GM is expected to acquire the Steering Business, refer to Note 21. Subsequent Events for further information. This payment is recorded as a deferred liability as of June 30, 2009. The Steering Business is reported as discontinued operations, refer to Note 17. Discontinued Operations for further information.

 

Reimbursement of Hourly Workers’ Compensation and Other Benefits — GM agreed to reimburse Delphi for all current and future workers compensation, disability, supplemental unemployment benefits, and severance obligations paid by Delphi after January 1, 2009 in relation to all current and former UAW-represented hourly active, inactive, and retired employees. Consistent with the substance of the provision, Delphi recognizes future anticipated reimbursements from GM contemporaneously with Delphi’s incurrence of related cash payments. During the three and six months ended June 30, 2009, Delphi received reimbursement from GM of $12 million and $15 million, respectively. Delphi recorded $13 million and $23 million as a reduction to cost of sales during the three and six months ended June 30, 2009, respectively. As of June 30, 2009, $8 million is recorded as receivable from GM.

 

Accelerated GM North American Payment Terms — The Amended MRA accelerates GM’s North American payment terms through 2011 upon (a) the effectiveness of an agreement giving GM certain access rights to four of the Company’s U.S plants in the event that the reorganized Company experiences extreme financial distress that would prevent Delphi from delivering parts at some point in the future and (b) the consummation of a modified chapter 11 plan of reorganization pursuant to which Delphi emerges with substantially all of its core businesses. As these conditions have not yet occurred, the provisions of this program are not yet effective, and there was no financial impact for this matter in the second quarter of 2009 or 2008.

 

The following table details changes during the six months ended June 30, 2009 in the GM and affiliates accounts receivable balance attributable to the Amended GSA and the Amended MRA, recorded in GM and

affiliates accounts receivable in the accompanying consolidated balance sheet at June 30, 2009 and December 31, 2008:

 

 

As of June 30, 2009, $123 million of the Amended GSA and Amended MRA accounts receivable was included in accounts receivable from General Motors and affiliates and $20 million was included in assets held for sale on the consolidated balance sheet.

 

The following table details the GM obligations recognized during the three and six months ended June 30, 2009:

 

 

Pensions — Resolve the current pension funding situation.

 

Since entering chapter 11, Delphi had generally limited its contributions to the Hourly Plan, the Delphi Retirement Program for Salaried Employees (the “Salaried Plan”), the ASEC Manufacturing Retirement Program, the Delphi Mechatronics Retirement Program, the PHI Bargaining Retirement Plan and the PHI Non-Bargaining Retirement Plan (together, the “Pension Plans”) to “normal cost” contributions, which are less than the minimum funding requirements established by the IRC and ERISA. Following the Court’s approval of the Hourly and Salaried Pension Program Modification Motion on September 23, 2008, the Salaried Plan, the Mechatronic Plan, the ASEC Plan, and the PHI Non-Bargaining Plan were frozen effective September 30, 2008. The Hourly Plan was frozen on November 30, 2008. By freezing the Pension Plans, Delphi halted the accrual of normal cost payments going forward, thereby preserving liquidity. Pursuant to the provisions of the Modified Plan, the remaining assets and liabilities of the Hourly Plan would no longer be the responsibility of Delphi. Delphi has indicated that it will be unable to satisfy its U.S. pension funding obligations for those plans covering its salaried employees and certain U.S. subsidiary employees. On July 21, 2009, Delphi announced that the Pension Benefit Guaranty Corporation (the “PBGC”) was expected to make a determination whether or not to initiate the termination process for Delphi’s Pension Plans. On July 22, 2009, the PBGC initiated the process to terminate Delphi’s Pension Plans. Delphi does not believe that a PBGC-initiated termination of the Hourly Plan would violate Delphi’s existing collective bargaining agreements or prior Court orders. Nevertheless, Delphi would not acquiesce to a termination of the Hourly Plan and would not enter into a trusteeship agreement with the PBGC to take over the Hourly Plan absent a Court finding that doing so is not a violation of Delphi’s collective bargaining agreements or a federal district court issues an order terminating the Hourly Plan. On July 30, 2009, the Court approved the Delphi-PBGC Settlement Agreement (defined below) and made the finding that such agreement did not violate Delphi’s collective bargaining agreements, and accordingly, the PBGC and Delphi will execute a termination and trusteeship agreement with respect to the Pension Plans. For additional information regarding the termination and trusteeship agreements with respect to the Pension Plans, refer to Note 21. Subsequent Events.

On July 21, 2009, Delphi reached agreement with the PBGC to settle the PBGC’s various claims against Delphi and its global affiliates (the “Delphi-PBGC Settlement Agreement”). Pursuant to that settlement agreement, the PBGC will receive a $3 billion allowed general unsecured nonpriority claim which will receive the same treatment given to holders of General Unsecured Claims under the Modified Plan. The PBGC will receive additional consideration from GM which, together with the PBGC’s allowed unsecured claim, is in consideration for, among other things, a full release of all causes of action, claims, and liens; the liability to be assumed by the PBGC related to the termination of the Pension Plans; and the withdrawal of all notices of liens filed by the PBGC against Delphi’s global non-U.S. affiliates. The Delphi-PBGC Settlement Agreement was approved by the Court on July 30, 2009.

 

As stated above, Delphi has not made certain minimum required contributions to the Pension Plans and as a result, the IRS has asserted against Delphi excise taxes in the approximate amounts of $17 million and $18 million for plan years ended September 30, 2005 and September 30, 2007, respectively, and may assert additional excise taxes up to an additional $122 million, $226 million and $1.2 million for plan years ended September 30, 2006, September 30, 2007 and September 30, 2008, respectively. If these asserted assessments are not paid, the IRS could increase the assessments that relate to the Salaried Plan to 100% of any Salaried Plan contributions considered by the IRS to be due and unpaid. However, because the September 29, 2008 414(l) Net Liability Transfer to the GM hourly plan avoided an accumulated funding deficiency in the Delphi Hourly Plan for the plan year ended September 30, 2008, exposure to the 100% excise tax related to the Delphi Hourly Plan has been eliminated for the plan year ended September 30, 2008. Assuming Delphi is assessed excise taxes for all plan years through 2007, the total exposure to date could approximate $383 million, plus interest and penalties, which could be substantial. Additional excise taxes could be assessed with respect to the subsidiary plans if the minimum required contributions to those plans for the plan year ended December 31, 2008, are not paid. To the extent unpaid contributions are not corrected by Delphi, any such excise tax assessments might be increased to 100% of any Salaried Plan and subsidiary plan contributions considered by the IRS to be due and unpaid.

 

Although the IRS has asserted certain of the excise tax assessments described above and might seek to assess additional excise taxes, plus interest and penalties, related to the Pension Plans, Delphi believes that under the Bankruptcy Code, the Company is not obligated to make contributions for pension benefits while in chapter 11 and that, as a result, the Company would not be liable for any such assessments. Accordingly, management has concluded that an unfavorable outcome is not currently probable and, as of June 30, 2009, no amounts have been recorded for any potential excise tax assessment.

 

Labor — Modify Delphi’s 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 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. Portions of these agreements became effective in 2007, and the remaining portions were tied to the effectiveness of the GSA and the MRA, and substantial consummation of the Plan as confirmed by the Court. However, as noted above, Delphi filed amendments to the GSA and the MRA in the Court on September 12, 2008, and subsequently entered into an additional amendment to the GSA as of September 25, 2008. The Court approved such amendments on September 26, 2008. The Amended GSA and the Amended MRA became effective on September 29, 2008.

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 hourly wages. Refer to Note 11. U.S. Employee Workforce Transition Programs for more information.

 

Portfolio — Streamline Delphi’s product portfolio to capitalize on world-class technology and market strengths and make the necessary manufacturing alignment with Delphi’s 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, wheel bearings and power products. With the exception of the catalyst and global exhaust product lines, included in the Powertrain Systems segment (refer to Note 19. Acquisitions and Divestitures), the Company’s non-core product lines are included in discontinued operations, refer to Note 17. Discontinued Operations.

 

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, labor unions and other stakeholders to carefully manage the transition of affected product lines and manufacturing sites. 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 consulted with the works councils in accordance with applicable laws regarding any sale or wind-down of affected manufacturing sites in Europe.

 

Costs recorded in the three and six months ended June 30, 2009 related to the transformation plan for non-core product lines include employee termination benefits and other exit costs and U.S. employee workforce transition program charges and are further described in Note 9. Employee Termination Benefits and Other Exit Costs, Note 11. U.S. Employee Workforce Transition Programs and Note 17. Discontinued Operations. In April 2009, Delphi received Court approval of bidding procedures for the sale of the remaining global suspension and brakes business. Refer to Note 19. Acquisitions and Divestitures for more information.

 

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

 

Delphi is continuing to implement restructuring initiatives in pursuit of its transformation objective to reduce selling, general and administrative expenses. These initiatives include changing the model for delivery of financial services, information technology and certain sales administration activities; as well as the reduction of the global salaried workforce by leveraging attrition and using salaried separation plans, and the realignment of certain salaried benefit programs with business conditions. While the continually challenging economic environment persists, further restructuring initiatives continue to be required. Delphi has implemented a number of cash conservation measures, including a short-term salaried layoff plan, the suspension of 2009 pay increases and annual incentive payments for eligible employees, the cessation of health care and life insurance benefits in retirement to salaried employees and retirees effective March 31, 2009 (refer to Note 12. Pension and Other Postretirement Benefits), a decrease in salaried severance payments and the elimination of salaried flex payments in 2009. Delphi continues to reduce other structural costs to further align itself with the current and projected volume outlook.

 

Equity Purchase and Commitment Agreement

 

Under the terms and subject to the conditions of the EPCA between Delphi and the Investors, the Investors committed to purchase $800 million of convertible preferred stock and approximately $175 million of common stock in the reorganized Company. Additionally, subject to satisfaction of other terms and conditions, the Investors committed to purchase any unsubscribed shares of common stock in connection with an approximately $1.6 billion rights offering that was made available to unsecured creditors. The rights offering commenced on March 11, 2008 and expired on March 31, 2008. In light of the Investors’ refusal to fund pursuant to the EPCA, as described below, in April 2008, the Company cancelled the rights offering and returned all funds submitted.

The Company would be required to pay the Investors $83 million plus certain transaction expenses if (a) the EPCA was 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 withdrew its recommendation of the transaction or the Company willfully breached the EPCA, and within the next 24 months thereafter, the Company then agreed to an alternative investment transaction.

 

On April 4, 2008, Delphi announced that although it had met the conditions required to substantially consummate its Plan, including obtaining $6.1 billion of exit financing, the Investors refused to participate in a closing that was commenced but not completed on that date. Several hours prior to the scheduled closing on April 4, 2008, Appaloosa delivered to Delphi a letter, stating that such letter “constitutes a notice of immediate termination” of the EPCA. Appaloosa’s April 4 letter alleged that Delphi had breached certain provisions of the EPCA, that Appaloosa is entitled to terminate the EPCA and that the Investors are entitled to be paid the fee of $83 million plus certain expenses and other amounts. At the time Appaloosa delivered its letter, other than the Investors, all the required parties for a successful closing and emergence from chapter 11, including representatives of Delphi’s exit financing lenders, GM, and the Unsecured Creditors and Equity Committees in Delphi’s chapter 11 cases were present, were prepared to move forward, and all actions necessary to consummate the plan of reorganization were taken other than the concurrent closing and funding of the EPCA.

 

On April 5, 2008, Appaloosa delivered to Delphi a letter described as “a supplement to the April 4 Termination Notice,” stating “this letter constitutes a notice of an additional ground for termination” of the EPCA. The April 5 letter stated that the EPCA’s failure to become effective on or before April 4, 2008 was grounds for its termination. On June 30, 2008, Merrill, Goldman, UBS and affiliates of Pardus and Harbinger delivered to Delphi letters of termination relating to the EPCA.

 

Delphi believes that Appaloosa wrongfully terminated the EPCA and disputes the allegations that Delphi breached the EPCA or failed to satisfy any condition to the Investors’ obligations thereunder as asserted by Appaloosa in its April 4 letter. Delphi’s Board of Directors formed a special litigation committee and engaged independent legal counsel to consider and pursue any and all available equitable and legal remedies, and on May 16, 2008, Delphi filed complaints against the Investors in the Court to seek specific performance by the Investors of their obligations under the EPCA as well as compensatory and punitive damages. No amounts related to this matter have been recorded in Delphi’s financial statements. The Investors filed motions to dismiss Delphi’s complaints, and on July 28, 2008, the Court denied in part and granted in part the Investors’ motions. Subsequently, the Investors filed motions for summary judgment, which are still pending. A trial date will be set following the Court’s ruling on the motions for summary judgment.

 

During 2007, 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 also paid certain 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. Delphi had deferred the recognition of these amounts in other current assets as they were to be netted against the proceeds from the EPCA upon issuance of the new shares. However, as a result of the events relating to the termination of the EPCA as described above, Delphi recognized $79 million of expense related to these fees and other expenses during the six months ended June 30, 2008.

 

The Plan of Reorganization

 

As noted above, due to the Investors failure to fund their commitments under the EPCA, Delphi was unable to consummate the Plan. On October 3, 2008, Delphi filed proposed modifications to the Plan and related modifications to the Disclosure Statement with the Court which contained an updated business plan associated with a mid-point total enterprise business valuation of $7.2 billion, and contemplated that Delphi would need to raise approximately $3.75 billion of emergence capital through a combination of term debt and

rights to purchase equity. However, since the filing of the proposed modifications, substantial uncertainty and a significant decline in capacity in the credit markets, the global economic downturn generally and the current economic climate in the automotive industry, adversely impacted Delphi’s ability to develop a revised recapitalization plan and successfully consummate a confirmed plan of reorganization or other consensual resolution of Delphi’s chapter 11 cases. Delphi continued comprehensive discussions with all of its stakeholders that have a continuing economic interest in its reorganization cases to formulate further plan modifications. In connection with those discussions, Delphi made further revisions to its business plan consistent with the extremely low volume production environment in the global automotive industry and depressed global capital and equity markets.

 

On June 1, 2009, Delphi filed further proposed modifications to the Plan and related modifications to the Disclosure Statement which set forth the Company’s plans to effect its emergence from chapter 11 reorganization through either a modified reorganization plan or sale under section 363 of the Bankruptcy Code pursuant to which Parnassus and GM Components would operate Delphi’s U.S. and non-U.S. businesses going forward with emergence capital and capital commitments of approximately $3.6 billion and without the legacy costs associated with the North American sites that are being acquired by GM Components together with Delphi’s Steering Business. Certain other residual non-core and non-strategic assets and liabilities were to remain with the Company and were expected to be divested over time.

 

On June 16, 2009 the Court entered the Solicitation Order approving, among other things, procedures with respect to soliciting votes on the Modified Plan and related disclosures and set a final hearing date to consider the proposed modifications. The Solicitation Order authorized and directed Delphi to solicit votes to accept or reject the plan as modified in accordance with specified procedures and also provided for the creation of a process through which other potential buyers could submit a binding offer for the Company. The deadline for submission by qualified bidders of potential alternative transactions to the transaction announced on June 1, 2009 with Parnassus and GM Components passed without the submission of any potential alternative transactions from any of the three third-party bidders qualified under supplemental procedures previously approved by the Court, but the Company did receive a timely pure credit bid notice from the Administrative Agent in its capacity as administrative agent under the Amended and Restated DIP Credit Facility, on behalf of the DIP Lenders.

 

On July 27, 2009, following a two-day auction process, Delphi’s Board of Directors, following consultation with Delphi’s official committee of unsecured creditors and its largest U.S.-based union, designated the pure credit bid received from the Administrative Agent on behalf of the DIP Lenders as the “Successful Bid.” Delphi also reached agreements with its official unsecured creditors’ committee and Wilmington Trust Corporation, the indenture trustee for several series of unsecured notes, to withdraw their objections to, and support, the Modified Plan, whether based on the transaction involving Parnassus and GM or the pure credit bid submitted by the Administrative Agent on behalf of Delphi’s DIP Lenders. On July 30, 2009, the Court confirmed Delphi’s Modified Plan, which incorporated the MDA among Delphi on behalf of itself and other affiliated entities, GM, Old GM, and DIP Holdco on behalf of itself and the other DIP Buyers, for the sale and purchase of substantially all of Delphi’s and its subsidiaries’ businesses.

A summary of certain terms of the Modified Plan follows:

 

 

Additionally, pursuant to an order entered by the Court on July 24, 2009, the Debtors’ exclusive period for filing a plan of reorganization, solely as to the Creditors’ Committee, has been extended through and including September 30, 2009 and the Debtors’ exclusive period for soliciting acceptance of a plan of reorganization, solely as to the Creditors’ Committee, has been extended through and including November 30, 2009.

 

Delphi will not emerge from bankruptcy as a going concern unless and until Delphi is able to consummate the Modified Plan. There can be no assurances that all necessary conditions will be satisfied. 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and in this

Quarterly Report on Form 10-Q. In addition, Delphi cannot assure that potential adverse publicity associated with the Chapter 11 Filings and the resulting uncertainty regarding its future prospects will not materially hinder its ongoing business activities and its ability to operate, fund and execute its business plan by impairing relations with existing and potential customers; negatively impacting its ability to attract, retain and compensate key executives and to retain employees generally; limiting its ability to obtain trade credit; and impairing present and future relationships with vendors and service providers. Accordingly, 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. The Modified Plan was confirmed notwithstanding its deemed rejection by the Company’s equity security holders and certain classes of creditors and notwithstanding the fact that such equity security holders and such classes of creditors will not receive or retain any property under the plan on account of their equity or creditor interests and the fact that distributions to holders of unsubordinated allowed general unsecured claims, if any, are contingent on a number of factors. 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.

 

The cost related to the remaining components of the transformation plan will be recognized in the Company’s consolidated financial statements as each other element of the Modified Plan becomes effective, including the remaining portions of the U.S. labor agreements and the MDA. The confirmation and consummation of a plan of reorganization and the agreements incorporated therein will significantly impact Delphi’s accounting for 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.

 

Reorganization Items

 

SOP 90-7 requires reorganization items such as revenues, expenses such as professional fees directly related to the process of reorganizing the Debtors under chapter 11 of the Bankruptcy Code, realized gains and losses, provisions for losses, and interest income resulting from the reorganization and restructuring of the business to be separately disclosed. Professional fees directly related to the reorganization include fees associated with advisors to the Debtors, unsecured creditors, secured creditors and unions. The Debtors’ reorganization items consist of the following:

 

 

Cash paid for professional fees was approximately $41 million and $58 million, respectively, for the six months ended June 30, 2009 and 2008.

 

Liabilities Subject to Compromise

 

As a result of the Chapter 11 Filings, the payment of prepetition indebtedness is subject to compromise or other treatment under the Debtors’ plan of reorganization. Generally, actions to enforce or otherwise effect payment of prepetition liabilities are stayed. Although prepetition claims are generally stayed, at hearings held

in October and November 2005, the Court granted final approval of the Debtors’ “first day” motions generally designed to stabilize the Debtors’ operations and covering, among other things, human capital obligations, supplier relations, customer relations, business operations, tax matters, cash management, utilities, case management, and retention of professionals. The following data regarding the number and amount of claims and proof of claims is unaudited.

 

The Debtors have been paying and intend to continue to pay undisputed postpetition claims in the ordinary course of business. In addition, pursuant to the Plan, the Debtors assumed most of their executory contracts and unexpired leases with respect to the Debtors’ operations, and rejected certain of them, with the approval of the Court. As of June 30, 2009, the Debtors’ have received approximately 16,800 proofs of claim, a portion of which assert, in part or in whole, unliquidated claims. In addition, the Debtors have compared proofs of claim they have received to liabilities they have already scheduled and determined that there are certain scheduled liabilities for which no proof of claim was filed. In the aggregate, total proofs of claim and scheduled liabilities assert approximately $34 billion in liquidated amounts, including approximately $900 million in intercompany claims, and additional unliquidated amounts. As is typical in reorganization cases, differences between claim amounts listed by the Debtors in their Schedules of Assets and Liabilities (as amended) and claims filed by creditors will be investigated and resolved in connection with the claims reconciliation process or, if necessary, the Court will make the final determination as to the amount, nature, and validity of claims. Many of these claims have been found to be duplicative, based on contingencies that have not occurred, or are otherwise overstated, and therefore have been determined to be invalid. As a result, the aggregate amount of claims filed with the Court exceeds the amount that has been to date allowed by the Court. As of June 30, 2009, the Debtors have filed 33 omnibus claims objections that objected to claims on procedural or substantive grounds. Pursuant to these claims objections, the Debtors have objected to approximately 14,000 proofs of claim asserting approximately $10.6 billion in aggregate liquidated amounts plus additional unliquidated amounts. As of June 30, 2009, the Court has entered orders disallowing and/or claimants have withdrawn approximately 9,800 of those claims, which orders reduced the amount of asserted claims by approximately $9.5 billion in aggregate liquidated amounts plus additional unliquidated amounts. In addition, the Court has entered an order modifying approximately 4,000 claims reducing the aggregate amounts asserted on those claims by $352 million, which amounts are subject to further objection by the Debtors at a later date on any basis. The Debtors anticipate that additional proofs of claim will be the subject of future objections as such proofs of claim are reconciled. The determination of how these liabilities are to be settled and treated is set forth in the Plan. In light of the number of creditors of the Debtors, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not determinable at this time. Classification for purposes of these financial statements of any prepetition liabilities on any basis other than liabilities subject to compromise is not an admission against interest or a legal conclusion by the Debtors as to the manner of classification, treatment, allowance, or payment in the Debtors’ chapter 11 cases, including in connection with any plan of reorganization that may be confirmed by the Court and that may become effective pursuant to an order of the Court. As of January 25, 2008, the total general unsecured claims, other than funded debt claims, against the Company had been reduced to an amount of approximately $1.45 billion. Refer to Plan of Reorganization and Transformation Plan above for details on the chapter 11 cases.

 

SOP 90-7 requires prepetition liabilities that are subject to compromise to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, or other events.

Liabilities subject to compromise consist of the following:

 

 

The decrease in liabilities subject to compromise at June 30, 2009 is due to the impact of the termination of health care and life insurance benefits in retirement to salaried employees, retirees and surviving spouses effective March 31, 2009 (refer to Note 12. Pension and Other Postretirement Benefits).

 

 

Inventories are stated at the lower of cost, determined on a first-in, first-out basis (“FIFO”), or market, including direct material costs and direct and indirect manufacturing costs. A summary of inventories, net is shown below:

 

 

 

Other current assets consisted of the following:

 

Other long-term assets consisted of the following:

 

 

 

Delphi evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Estimates of future cash flows used to test the recoverability of long-lived assets include separately identifiable undiscounted cash flows expected to arise from the use and eventual disposition of the assets. Where estimated future cash flows are less than the carrying value of the assets, impairment losses are recognized based on the amount by which the carrying value exceeds the fair value of the assets. The fair value of the assets was determined based on the “held for use” classification. Delphi recorded long-lived asset impairment charges totaling $36 million and $37 million for the three and six months ended June 30, 2009, respectively, and $5 million and $6 million for the three and six months ended June 30, 2008, respectively, in depreciation and amortization.

 

Included in the totals above, during the second quarter of 2009, Delphi’s Electronics and Safety segment recorded $34 million of long-lived asset impairment charges related to the exit of its occupant protection systems business in North America and Europe. Also, in 2008, Delphi made the decision to divest the occupant protection systems business in Germany. Based on an estimate of anticipated proceeds, Delphi recognized a charge of $13 million, included in cost of sales, in the fourth quarter of 2008. The divestiture is expected to occur during 2009.

 

During the second quarter of 2009, Delphi’s Electrical/Electronic Architecture segment recognized a charge of $7 million in cost of sales related to assets held for sale of a certain facility in North America that it intends to sell. The sale is expected to occur during the third quarter of 2009. Additionally, Delphi’s Powertrain Systems segment recognized a charge of $3 million in cost of sales related to the assets held for sale of the Exhaust Business (as defined in Note 19. Acquisitions and Divestitures). Refer to Note 19. Acquisitions and Divestitures for more information.

 

 

At June 30, 2009 and December 31, 2008, Delphi’s goodwill balance in Corporate and Other was approximately $63 million and $62 million, respectively.

 

Delphi reviews the recoverability of goodwill annually on May 31 and at any other time when business conditions indicate a potential change in recoverability. Delphi’s annual recoverability tests on May 31, 2009 did not present any indicators of impairment. In conjunction with Delphi’s annual recoverability test on May 31, 2008, the deterioration of Delphi’s financial performance, combined with an unfavorable outlook, were indicators for potential impairment. More specifically, during the second quarter of 2008, Delphi experienced deteriorated financial performance primarily due to significant reductions in North American customer production volumes, particularly related to GM, continuing unfavorable pricing pressures and increasing commodity prices. This caused

previously unanticipated projected revenue and operating income declines. As a result of these changes, long-term projections showed declines in discounted future operating cash flows. These revised cash flows and declining market conditions caused the implied fair value of Delphi’s Electrical/Electronic Architecture segment to be less than its book value. The fair value was also adversely affected by declining industry market valuation metrics. Accordingly, the Company recorded $168 million of goodwill impairment charges during the three and six months ended June 30, 2008 related to the Electrical/Electronic Architecture segment.

 

Delphi performed its goodwill impairment test by comparing the carrying value of each of its reporting units to the fair value of the reporting unit. In determining fair value of reporting units, Delphi utilized a number of methodologies, including discounted cash flow analysis and review of fair value appraisals. Where the carrying value exceeded the fair value for a particular reporting unit, goodwill impairment charges were recognized. The goodwill impairment charges recognized were determined by stating all other assets and liabilities of a reporting unit at their fair values with the remaining fair value of the reporting unit attributed to goodwill. The resulting goodwill impairment charges are the excess of the recorded goodwill balance over the implied fair value of goodwill for the reporting unit. Delphi’s reporting units are the global businesses focused on product families. The fair value of the reporting units was negatively impacted by the continued deterioration of business conditions, principally in North America, as previously described.

 

 

Accrued liabilities consisted of the following:

 

 

Other long-term liabilities consisted of the following:

 

 

 

Delphi recognizes expected warranty costs for products sold principally at the time of sale of the product based on Delphi’s estimate of the amount that will eventually be required to settle such obligations. These accruals are based on factors such as past experience, production changes, industry developments and various other considerations. Delphi’s estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims.

 

The table below summarizes the activity in the product warranty liability for the six months ended June 30, 2009:

 

 

Approximately $125 million and $128 million of warranty obligations as of June 30, 2009 and December 31, 2008, respectively, is included in accrued liabilities in the accompanying consolidated balance sheets. Approximately $206 million and $236 million of warranty obligations as of June 30, 2009 and December 31, 2008, respectively, is included in other long-term liabilities.

 

 

Delphi continually evaluates alternatives to align its business with the changing needs of its customers and to lower the operating costs of the Company. This includes the realignment of its existing manufacturing capacity, facility closures, or similar actions in the normal course of business. These actions may result in voluntary or involuntary employee termination benefits, which are mainly pursuant to union or other contractual agreements. Voluntary termination benefits are accrued when an employee accepts the related offer. Involuntary termination benefits are accrued when Delphi commits to a termination plan and the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable, depending on the circumstances of the termination plan. Contract termination costs are recorded when contracts are terminated or when Delphi ceases to use the facility and no longer derives economic benefit from the contract. All other exit costs are accrued when incurred.

 

Delphi’s employee termination benefit and other exit costs are undertaken as necessary to execute management’s strategy, streamline operations, take advantage of available capacity and resources, and ultimately achieve net cost reductions. These activities generally fall into one of two categories:

 

(1) Realignment of existing manufacturing capacity and closure of facilities and other exit or disposal activities, as it relates to executing the Company’s strategy in the normal course of business.

 

(2) Transformation plan activities, which support the Company’s overall transformation initiatives announced in 2006, including selling or winding down non-core product lines, transforming its salaried workforce to reduce general and administrative expenses, and modifying labor agreements with its principal unions in the U.S.

The following table summarizes the employee termination benefit and other exit cost charges recorded for the three and six months ended June 30, 2009 and 2008 by operating segment:

 

 

The table below summarizes the activity in the employee termination benefits and exit costs liability for the six months ended June 30, 2009:

 

 

Approximately $147 million and $163 million of the employee termination benefits and other exit costs accrual balance as of June 30, 2009 and December 31, 2008, respectively, is included in accrued liabilities in the accompanying consolidated balance sheets. Approximately $18 million and $13 million of the employee termination benefits and other exit costs accrual balance as of June 30, 2009 and December 31, 2008, respectively, is included in other long-term liabilities. Approximately $60 million and $74 million of the employee termination benefits and other exit costs accrual balance as of June 30, 2009 and December 31, 2008, respectively, is included in liabilities held for sale.

 

Delphi has initiated several programs to streamline operations and lower costs. The following are details of significant charges during the three and six months ended June 30, 2009.

 

 

 

The following are details of significant charges during the three and six months ended June 30, 2008.

 

 

 

Amended and Restated DIP Credit Facility and Accommodation Agreement

 

During the first quarter of 2007, Delphi refinanced its prepetition and postpetition credit facilities by entering 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. During the second quarter of 2008, Delphi received Court approval and the required commitments from its lenders to amend and extend its Amended and Restated DIP Credit Facility, which amendments and extension became effective in May 2008. As a result, the Amended and Restated DIP Credit Facility is the aggregate size of $4.35 billion (as compared to $4.5 billion), consisting of a $1.1 billion first priority revolving credit facility (the “Tranche A Facility” or the “Revolving Facility”), a $500 million first priority term loan (the “Tranche B Term Loan”) and a $2.75 billion second priority term loan (the “Tranche C Term Loan”).

 

On December 12, 2008, Delphi entered into the Accommodation Agreement allowing Delphi to retain the proceeds of its Amended and Restated DIP Credit Facility. Under the Accommodation Agreement, the lenders under the Amended and Restated DIP Credit Facility have agreed among other things to allow Delphi to continue using the proceeds of such facility and to forbear from the exercise of certain default-related remedies in each case until June 30, 2009 subject to continued compliance of the Amended and Restated DIP Credit Facility (as amended and modified by the Accommodation Agreement, as amended).

 

Throughout the first and second quarters of 2009 and through August 11, 2009, Delphi entered into several further amendments and supplements to the Accommodation Agreement (the “Accommodation Agreement Amendments”), which further extended certain milestone dates in the Accommodation Agreement and ultimately extended the accommodation period under the Accommodation Agreement to August 13, 2009 until 8:00 p.m. (Eastern time). Additionally, pursuant to the Accommodation Agreement Amendments, among other things, (i) the lenders have postponed Delphi’s obligations to make current payments of interest in respect of the Tranche C Term Loan, (ii) Delphi has the ability to access certain cash collateral baskets to make certain distributions consistent with the MDA and the Modified Plan and (iii) to the extent that such cash is used in a manner consistent with the MDA and the Modified Plan, Delphi is permitted to access certain cash from its foreign subsidiaries without using the proceeds thereof to repay the DIP loans (as was previously required under the Accommodation Agreement). For a full description of each of the amendments, see Delphi’s Annual Report on Form 10-K for the year ended December 31, 2008 and Delphi’s Quarterly Report on Form 10-Q for the period ended March 31, 2009 and Delphi’s Current Reports on Form 8-K filed with the United States Securities and Exchange Commission on June 2, 2009, June 9, 2009, June 18, 2009, June 22, 2009, June 24, 2009, July 1, 2009, July 8, 2009, July 13, 2009, July 20, 2009, July 22, 2009, July 30, 2009, July 30, 2009, August 3, 2009, August 5, 2009, August 7, 2009 and August 10, 2009. The following description of the Accommodation Agreement reflects all amendments through the date hereof.

 

In connection with an amendment entered on March 31, 2009, Delphi applied all previously collected interest payments in respect of the Tranche C Term Loan, approximately $86 million, ratably as repayments of principal outstanding under the Tranche A Facility and the Tranche B Term Loan. In conjunction with the effectiveness of this amendment, $25 million of amounts in a cash collateral account were ratably applied to pay down principal amounts outstanding under the Tranche A Facility and Tranche B Term Loan. In addition, the amendment entered on April 22, 2009 provides that all future Tranche C interest payments will be applied ratably to repayments of principal amounts outstanding under the Tranche A Facility and the Tranche B Term Loan until paid in full. Delphi continues to recognize the contractual accrued interest on the Tranche C Term Loan.

 

Termination Date of the Accommodation Agreement

 

Under the Accommodation Agreement (as amended through the date of this report), Delphi may continue using the proceeds of the Amended and Restated DIP Credit Facility and the lenders have agreed, among other things, to forbear from the exercise of certain default-related remedies, in each case until the earlier to occur of (i) August 13, 2009 at 8:00 p.m. (Eastern time); (ii) Delphi’s failure to comply with its covenants, including the milestone dates described below, under the Accommodation Agreement or the occurrence of certain other events set forth in the Accommodation Agreement; and (iii) an event of default under the Amended and Restated DIP Credit Facility (other than the failure to repay the loans under the facility on the maturity date or comply with certain other repayment

provisions). To date, Delphi has been successful in obtaining short-term extensions to the termination date of the Accommodation Agreement and will continue to seek such extensions until such time as the Modified Plan is effective, however, there can be no assurances that it will continue to be successful in obtaining such extensions as needed.

 

Additionally, the accommodation period under the Accommodation Agreement will terminate on August 14, 2009, in the event that a majority of the Tranche A and Tranche B lenders who have signed the Accommodation Agreement and a majority of all lenders who signed the Accommodation Agreement have not notified Delphi that a detailed term sheet, which has been agreed to by both GM and the U.S. Treasury and which sets forth the terms of a global resolution of matters relating to GM’s contribution to the resolution of Delphi’s chapter 11 cases, including, without limitation, all material transactions between Delphi and GM relevant to such resolution, delivered by Delphi to the agent under the Amended and Restated DIP Credit Facility, is satisfactory on or before August 13, 2009.

 

Requirements of the Accommodation Agreement

 

Notwithstanding the Accommodation Agreement, Delphi is in default of the terms of its Amended and Restated DIP Credit Facility and as a result, as of December 12, 2008, the effective date of the Accommodation Agreement, Delphi is no longer able to make additional draws under the facility. However, under the Accommodation Agreement, Delphi is required to continue to comply with the provisions of the Amended and Restated DIP Credit Facility (as amended and modified by the Accommodation Agreement), in addition to the provisions of the Accommodation Agreement. To date, Delphi has been able to maintain sufficient liquidity to continue operations, however, there can be no assurances this will continue to be the case, (refer to Liquidity Outlook in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations).

 

Terms of the Amended and Restated DIP Credit Facility and Accommodation Agreement

 

The facilities currently bear interest at the Administrative Agent’s Alternate Base Rate (“ABR”) plus a specified percent, as detailed in the table below, and the amounts outstanding (in millions) and rates effective as of June 30, 2009 were:

 

 

The Tranche A, Tranche B and Tranche C facilities include an ABR floor of 4.25%.

 

The Company had $46 million in letters of credit outstanding under the Revolving Facility as of June 30, 2009. The amount outstanding at any one time under the First Priority Facilities is limited by a borrowing base computation as described in the Accommodation Agreement. Under the Accommodation Agreement, Delphi is required to provide weekly borrowing base calculations to the bank lending syndicate. Based on the borrowing base computation in effect at June 30, 2009, as defined in the Accommodation Agreement, Delphi’s borrowing base was reduced by a deduction of $116 million for unrealized losses related to Delphi’s hedging portfolio, which as of June 30, 2009 resulted in net losses included in accumulated other comprehensive income (“OCI”) of $219 million pre-tax, primarily related to copper and Mexican Peso hedges, as further described in Note 16. Financial Instruments, Derivatives and Hedging Activities and Fair Value Measurements.

 

The Amended and Restated DIP Credit Facility and the Accommodation Agreement includes affirmative, negative and financial covenants that impose restrictions on Delphi’s financial and business operations, including Delphi’s ability, among other things, to incur or secure other debt, make investments, sell assets and pay dividends or repurchase stock.

The Amended and Restated DIP Credit Facility also contains certain defaults and events of default customary for debtor-in-possession financings of this type. Upon the occurrence and during the continuance of any default in payment of principal, interest or other amounts due under the Amended and Restated DIP Credit Facility, and interest on all outstanding amounts is payable on demand at 2% above the then applicable rate. The Accommodation Agreement contains further defaults and events of default, the occurrence of which (absent a waiver or cure thereof within the applicable grace period) could result in the termination of the accommodation period under the Accommodation Agreement. Delphi was in compliance with the Amended and Restated DIP Credit Facility and Accommodation Agreement covenants as in effect on June 30, 2009.

 

In the six months ended June 30, 2009, the Company received authority from the Court to pay applicable fees to various lenders in conjunction with certain amendments entered into during the first and second quarters of 2009, and paid approximately $38 million in fees to the consenting lenders for all amendments. Delphi also paid arrangement and other fees to various lenders associated with the amendments.

 

Advance Agreement and Liquidity Support from General Motors and Related Matters

 

Concurrently with the Amended and Restated DIP Credit Facility, Delphi entered into an agreement with GM whereby GM agreed to advance Delphi amounts anticipated to be paid following the effectiveness of the GSA and MRA (the “GM Advance Agreement”). The original GM Advance Agreement had a maturity date of the earlier of December 31, 2008, when $650 million was to have been paid under the GSA and MRA and the date on which a plan of reorganization becomes effective. The original GM Advance Agreement provided for availability of up to $650 million, as necessary for Delphi to maintain $500 million of liquidity, as determined in accordance with the GM Advance Agreement. The amounts advanced accrue interest at the same rate as the Tranche C Term Loan on a paid-in-kind basis. The accrued interest on the advances made through the effectiveness of the Amended GSA and Amended MRA was cancelled due to the effectiveness of the Amended GSA and Amended MRA, as more fully described in Note 2. Transformation Plan and Chapter 11 Bankruptcy, and Delphi was not able to redraw the original $650 million facility amount.

 

On September 26, 2008, the Court granted Delphi’s motion to amend the original GM Advance Agreement to provide for a $300 million facility, which could be drawn against from time to time as necessary for Delphi to maintain $300 million of liquidity, as determined in accordance with the amendment to the GM Advance Agreement signed on August 7, 2008 and to give GM an administrative claim for all unpaid advances under such additional facility.

 

On June 10, 2009, the Court granted Delphi’s motion to further amend and restate the original GM Advance Agreement between Delphi and GM. The effectiveness of the amendment and restatement was subject to certain conditions precedent which were fully satisfied on June 16, 2009. Pursuant to the amendment and restatement of the GM Advance Agreement, GM agreed to furnish a $250 million credit facility (the “Tranche C Facility”) to Delphi subject to certain conditions specified therein. The following description of the terms of the Tranche C Facility is qualified by reference to the full text of the GM Advance Agreement (as so amended and restated through the date hereof). The GM Advance Agreement did not materially alter the terms and conditions of the original GM Advance Agreement with respect to the previously agreed to $300 million facility (the “Tranche B Facility”), however, the commitments under the Tranche B Facility have expired and all loans under the Tranche B Facility are required to be repaid concurrently with the repayment of the loans under the Tranche C Facility. Between July 23, 2009 and August 11, 2009, Delphi entered into further amendments to the GM Advance Agreement. The combined effect of these amendments was to extend the deadline for Delphi to satisfy certain milestones, which if not met, would prevent Delphi from continued access to the Tranche C Facility. To date, Delphi has been successful in obtaining short-term extensions of the deadline concurrent with the extensions of the termination date of the Accommodation Agreement and will continue to seek such extensions until such time as the Modified Plan is effective, however, there can be no assurances that it will continue to be successful in obtaining such extensions as needed. For more details regarding the GM Advance Agreement and the various amendments, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.

 

Additionally, GM has agreed, subject to certain conditions, to accelerate payment of certain payables up to $300 million to Delphi, pursuant to the Partial Temporary Accelerated Payments Agreement (“PTAP”). As of June 30, 2009, GM had accelerated payment of $300 million under such agreement and therefore no

amounts remain to be accelerated thereunder. The PTAP provides that GM will generally recoup these accelerated payments from its September, 2009 MNS-2 payment to Delphi.

 

The GM Advance Agreement (as amended and restated) currently has a targeted cash balance amount of $25 million and Delphi is required to use any free cash flow above the targeted cash balance amount (as determined in accordance with the GM Advance Agreement) to repay from time to time (in accordance with the GM Advance Agreement) any amounts outstanding thereunder. As of June 30, 2009, $400 million was outstanding pursuant to the GM Advance Agreement and $150 million was available for future advances. As of July 31, 2009, the remaining $150 million was outstanding pursuant to the GM Advance Agreement and there were no amounts available for future advances. There can be no assurances, however, that GM will have sufficient liquidity to continue to advance amounts under the GM Advance Agreement. Refer to Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and Part II. Item 1A. Risk Factors in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and in this Quarterly Report on Form 10-Q for risks and uncertainties related to Delphi’s business relationship with GM.

 

Other Matters

 

In conjunction with the entry into the Amended and Restated DIP Credit Facility, the Refinanced DIP Credit Facility was terminated. Delphi incurred no early termination penalties in connection with the termination of this agreement. However, as a result of significant changes in the debt structure and corresponding cash flows related to the refinancing, Delphi expensed $49 million of unamortized debt issuance costs related to the Amended and Restated DIP Credit Facility and the Refinanced DIP Credit Facility in the second quarter of 2008, which was recognized as loss on extinguishment of debt.

 

 

The following table represents the activity in the U.S. employee workforce transition program liability for the six months ended June 30, 2009:

 

U.S. Employee Workforce Transition Program Liability

 

 

During the second quarter of 2009, the buydown wage asset and liability were adjusted to exclude sites that were no longer expected to be active at the time of the final buydown payment in October 2009. Approximately $16 million of the adjustment relates to sites that are included in the UAW buydown arrangements under the 2007 U.S. hourly workforce special attrition programs.

 

At June 30, 2009 and December 31, 2008, $81 million and $115 million, respectively, of the U.S. employee workforce transition program liability is included in accrued liabilities, and $3 million and $8 million, respectively, is included in other long-term liabilities in the consolidated balance sheets. At June 30, 2009 and December 31, 2008, Delphi had $52 million and $68 million, respectively, of buydown wage liability recorded as a receivable from GM related to Delphi’s buydown wage obligations pursuant to the terms of the Amended GSA (see Note 2. Transformation Plan and Chapter 11 Bankruptcy).

 

 

As of June 30, 2009, Delphi sponsored pension plans covering unionized employees in the U.S., which generally provided benefits of stated amounts for each year of service, as well as supplemental benefits for employees who qualify for retirement before normal retirement age. Delphi also sponsored defined benefit plans covering U.S. salaried employees, with benefits generally based on years of service and salary history. Certain Delphi employees also participated in non-qualified pension plans covering executives, which are based on targeted wage

replacement percentages and are unfunded. Delphi’s funding policy with respect to its qualified plans was to contribute annually, not less than the minimum required by applicable laws and regulations, including the Bankruptcy Code. Certain of Delphi’s non-U.S. subsidiaries also sponsored defined benefit pension plans, which generally provided benefits based on negotiated amounts for each year of service. Delphi’s primary non-U.S. plans are located in Germany, Mexico and the United Kingdom (“UK”). The UK and certain Mexican plans are funded quarterly.

 

Delphi froze the Salaried Plan, the Supplemental Executive Retirement Program (“SERP”), the ASEC Manufacturing Retirement Program, the Delphi Mechatronics Retirement Program and the PHI Non-Bargaining Retirement Plan effective September 30, 2008. Effective as of October 1, 2008, Delphi’s existing Savings-Stock Purchase Program for Salaried Employees was renamed the Salaried Retirement Savings Program and was enhanced to provide a Delphi matching contribution and a 4% non-elective Delphi retirement contribution. Additionally, Delphi reached agreement with its labor unions resulting in a freeze of traditional benefit accruals under the Hourly Plan effective as of November 30, 2008. Certain collectively bargained hourly employees continued earning accruals under the Hourly Plan’s Individual Retirement Plan formula (a cash balance benefit providing an annual pay credit accrual of 5.4% of base wages) prior to the Hourly Plans termination by the PBGC. In conjunction with the modifications to its confirmed plan of reorganization filed on June 1, 2009, the remaining assets and liabilities of the Hourly Plan will no longer be the responsibility of Delphi. Delphi has also indicated that it will be unable to satisfy its U.S. pension funding obligations for those plans covering its salaried employees and certain U.S. subsidiary employees. On July 22, 2009, the PBGC initiated the process to terminate Delphi’s Pension Plans. Delphi does not believe that a PBGC initiated termination of the Hourly Plan would violate Delphi’s existing collective bargaining agreements or prior Court orders. Nevertheless, Delphi would not acquiesce to a termination of the Hourly Plan and would not enter into a trusteeship agreement with the PBGC to take over the Hourly Plan without (i) a Court finding that doing so would not be a violation of Delphi’s collective bargaining agreements or (ii) a federal district court order terminating the Hourly Plan. On July 30, 2009, the Court approved the Delphi-PBGC Settlement Agreement and made the finding that such agreement did not violate Delphi’s collective bargaining agreements. Accordingly, the PBGC and Delphi will execute a termination and trusteeship agreement with respect to the Pension Plans. Termination of the plans by the PBGC will likely result in settlement accounting in the third quarter of 2009.

 

On March 11, 2009, the Court issued a final order approving Delphi’s motion to terminate retiree medical and life insurance benefits (collectively “OPEB”) benefits in retirement to salaried employees, retirees, and surviving spouses after March 31, 2009 based on the Court’s finding following consideration of materials provided by the retirees’ committee appointed by the U.S. Trustee (the “Retirees’ Committee”), which committee was established to review whether it believes that any of the affected programs involved vested benefits (as opposed to “at will” or discretionary, unvested benefits), that the Company had met its evidentiary burdens. The Court also approved a settlement agreement (the “Settlement”), between Delphi and the Retirees’ Committee and the Delphi Salaried Retirees’ Association (the “Association”) settling any and all rights for the parties to appeal the Court’s March 11, 2009 final order authorizing Delphi to terminate salaried OPEB benefits to the U.S. District Court for the Southern District of New York (the “District Court”). Refer to Delphi’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 for the details of the Settlement. Delphi recognized a salaried OPEB settlement gain from reorganization of $1,168 million during the six months ended June 30, 2009.

The amounts shown below reflect the defined benefit pension and other postretirement benefit expense for the three- and six-month periods ended June 30, 2009 and 2008 for U.S. and non-U.S. employees: