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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2002

OR

For the transition period from                         to                          .

COMMISSION FILE NO. 1-13683

DELCO REMY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

(765) 778-6499
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

             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:

xYes                                                                                                   No __

             Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

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Delco Remy International, Inc. and Subsidiaries

INDEX

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PART I FINANCIAL INFORMATION

Delco Remy International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)

See Notes to Condensed Consolidated Financial Statements

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Delco Remy International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)

See Notes to Condensed Consolidated Financial Statements

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Delco Remy International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

See Notes to Condensed Consolidated Financial Statements

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DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands)

1. Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. The unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Certain prior year amounts have been reclassified to conform to the current year’s presentation. The Company reclassified operating results and cash flows in 2002 and 2001 and the balance sheet at December 31, 2001 to reflect the classification of the Company’s retail aftermarket gas engine business as a discontinued operation. For more information on this matter refer to Note 9.

Operating results for the three-month and nine-month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the full year. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. Other than as described in Note 5, the Company has not materially changed its significant accounting policies from those disclosed in its Form 10-K for the year ended December 31, 2001. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2001.

2. Additional Balance Sheet Information

The components of inventory were as follows:

3. Accumulated Other Comprehensive Income (Loss)

The Company’s other comprehensive income (loss) consists of unrealized net gains and losses on the translation of the assets and liabilities of its foreign operations, currency instruments, interest rate swaps and

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minimum pension liability adjustments. The before tax income (loss), related income tax expense (benefit) and accumulated balance are as follows:

The Company’s total comprehensive loss was as follows:

4. Restructuring Charges

In September 2002, the Company recorded a charge of $2,960 in conjunction with plans for the closure of the manufacturing and administrative functions of its discontinued retail aftermarket gas engine business. The charge, which was reported as a component of the loss from discontinued operations, included $668 for the estimated cost of various voluntary and involuntary employee separation programs associated with workforce reductions of approximately 165 production and administrative employees. Substantially all payments under these programs will be made in the fourth quarter of 2002. The charge also included $2,292 for the estimated cost of closing facilities.

In the fourth quarter of 2001, the Company recorded a charge of $39,349 in conjunction with plans for the closure and realignment of certain manufacturing facilities and administrative functions in the United States, Canada and Europe. The charge included $26,727 for the estimated cost of various voluntary and involuntary employee separation programs associated with workforce reductions of approximately 820 production and administrative employees. A total of $2,482 was paid in the fourth quarter of 2001, and $13,482 was paid in the nine month period ended September 30, 2002. Approximately $1,584, $4,593 and $4,586 are expected to be paid in the last three months of 2002, and in 2003 and 2004, respectively. In the first quarter of 2002, the Company recorded a $4,375 gain relating to the post-employment benefit plan curtailment associated with these workforce reductions. This gain was credited to cost of goods sold.

In June 2000, the Company recorded a charge of $35,222 for the realignment of certain manufacturing facilities. The charge included $27,098 for the estimated cost of various voluntary and involuntary employee

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separation programs associated with workforce reductions of approximately 860 employees, primarily production employees. A total of $5,011, $15,961, $3,087 and $1,630 were paid in the year ended July 31, 2000, the five months ended December 31, 2000, the year ended December 31, 2001 and the nine month period ended September 30, 2002, respectively. Approximately $1,277 and $132 will be paid in the last three months of 2002 and in 2003, respectively.

The following table summarizes the reserve for restructuring charges:

5. Recently Issued Accounting Standards

On October 3, 2001, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121)and the accounting and reporting provisions of APB Opinion Number 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for segments of a business to be disposed of. Among its many provisions, SFAS No. 144 retains the fundamental requirements of both previous standards; however, it resolves significant implementation issues related to SFAS No. 121 and broadens the separate presentation of discontinued operations in the income statement required by APB Opinion Number 30 to include a component of an entity (rather than a segment of a business). The Company adopted SFAS No. 144 on January 1, 2002. The presentation of the Company’s retail aftermarket gas engine business as a discontinued operation is in accordance with the provisions of SFAS No. 144.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (SFAS No. 145). The provisions of SFAS No. 145 related to the rescission of FASB Statements No. 44 and 64 and amendment of SFAS No. 13 and Technical Corrections were adopted by the Company in the second quarter of 2002. Adoption of these provisions did not have a material effect on the Company’s results of operations, financial position or cash flows. The provisions of SFAS No. 145 related to rescission of SFAS No. 4 are required to be adopted by the first quarter of 2003. Upon adoption, gains and losses relative to early extinguishment of debt which are reported as extraordinary items will be reclassified to operating expense or income.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and is effective for exit or disposal activities that are initiated after December 31, 2002.

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6. Goodwill and Other Intangible Assets-Adoption of SFAS No. 142.

On June 29, 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 addresses accounting and reporting of acquired goodwill and other intangible assets and was adopted by the Company effective January 1, 2002. The goodwill impairment testing provisions of SFAS No. 142 must be applied to any goodwill or other intangible assets that are recognized in the Company’s financial statements at the time of adoption. Also upon adoption, goodwill is no longer amortized and is tested for impairment at least annually. Excluding goodwill amortization of $1,819, the Company’s net loss from continuing operations would have been $1,858 in the quarter ended September 30, 2001. Excluding goodwill amortization of $4,778, the Company’s net loss would have been $1,686 in the nine months ended September 30, 2001. At September 30, 2002, the Company had goodwill and other intangible assets totaling $189,500, net of accumulated amortization. Any goodwill or other intangible assets impairment losses recognized from the initial impairment test will be reported as a cumulative effect of a change in accounting principle in the Company’s financial statements. The Company has completed step one of the transitional impairment test required by SFAS No. 142. The test indicates potential impairment losses in certain of its original equipment and aftermarket businesses. The amount of the loss, if any, will be determined in the fourth quarter of 2002 and reported as the cumulative effect of a change in accounting principle effective in the first quarter of 2002.

7. Long-term Debt

On June 28, 2002 the Company entered into a $250,000 secured, asset based, revolving credit facility (the “Senior Credit Facility”) with a syndicate of banks led by Wachovia Bank, National Association and its subsidiary Congress Financial Corporation. The Senior Credit Facility replaced the Company’s then-existing secured revolving credit facility of $200,000, which was due to expire on March 31, 2003. The Senior Credit Facility extends through March 31, 2006 and has provisions for annual extensions thereafter.

The Senior Credit Facility contains various restrictive covenants, which include, among other things: (i) limitations on additional borrowings and encumbrances; (ii) the maintenance of certain financial ratios and compliance with certain financial tests and limitations; (iii) limitations on cash dividends paid; (iv) limitations on investments and capital expenditures; and (v) limitations on leases and sales of assets.

The Senior Credit Facility is collateralized by liens on substantially all assets of the Company and its domestic and certain foreign subsidiaries and by the capital stock of such subsidiaries.

At September 30, 2002, borrowings under the Senior Credit Facility were $149,600 and utilization of letters of credit totaled $6,800, leaving $93,600 unused and $51,500 available under the Senior Credit Facility.

8. Redeemable Preferred Stock

Preferred stock – Series A has been reclassified from stockholders’ equity to mezzanine equity to reflect the mandatory redemption on April 16, 2021. Accrued preferred dividends have been combined with the preferred stock in this caption to reflect the current redemption value. The reclassification has been retroactively applied to prior periods and had no effect on net income (loss).

9. Acquisitions

During the nine months ended September 30, 2002, the Company made payments totaling $5,398 under contractual put agreements to purchase additional shares from the minority shareholders of World Wide Automotive, Inc. (“World Wide”), which was acquired in 1997. These payments increased the Company’s

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ownership percentage of World Wide from 88.2% to 94.0%. The Company made payments totaling $2,538 under contractual put agreements to purchase additional shares from the minority shareholder of Power Investments, Inc. (“Power”), which was acquired in 1996. These payments increased the Company’s ownership percentage of Power from 85.8% to 89.3%. The Company also made payments totaling $5,485 to purchase additional shares from the minority shareholders of Delco Remy Korea, which was acquired in 1999. This transaction increased the Company’s ownership percentage in Delco Remy Korea from 81.0% to 89.8%. Contingent earn-out payments of $497 were made during the quarter ended March 31, 2002 relative to the acquisition of Mazda North American Operations in June 2001. The Company currently expects to make additional payments of approximately $19,000 during the next twelve months to minority shareholders under existing contractual commitments.

10. Discontinued Operations

In the second quarter of 2002, the Company concluded that its retail aftermarket gas engine business does not fit with its strategic objectives and completed plans to exit the business. In connection with the discontinuance of the business, a one-time charge of $33,474 was recorded in the second quarter of 2002 to write down the relevant assets to their estimated realizable value. An additional charge of $2,960 was recorded in the third quarter of 2002 for the estimated cost of employee termination benefits and closure of facilities (see Note 4). Estimated future taxable income relative to discontinued operations, both in the United States and Canada, and reversing taxable temporary differences, are not sufficient to absorb the losses recorded to date. Therefore, a valuation allowance equal to the 2002 income tax effect of the losses was established in the third quarter of 2002. The Company currently expects to complete transfer of customer contracts and the sale and liquidation of the remaining assets during the fourth quarter of 2002. Additional operating losses during the wind-down period will be incurred during the fourth quarter of 2002 and will be reported in results from discontinued operations. Net sales, interest expense and loss before income tax from the discontinued operation are as follows: