From Detroit Free Press

TROY, MI — Delphi Corp. narrowed its third-quarter loss to $114 million, and generated more cash than expected, but acknowledged a widening government probe into its accounting practices.

The nation’s largest auto-parts maker warned Oct. 5 that it could lose as much as $120 million from July through September because steel and plastic prices rose dramatically, and its biggest customer, General Motors Corp., built fewer cars and trucks.

Delphi had hoped to trim its loss to $10 million to $40 million after losing $353 million in the third quarter of 2003.

In early October, the company thought it could generate up to $300 million in operating cash flow, but strong bill collections — or accounts receivable — helped boost cash profits to $360 million for the quarter, said Chief Financial Officer Alan Dawes.

That result “was more than we even expected at that time. . . . We think it’s a positive worth talking about,” he said. Operating cash flow measures profits, like net income does, but it excludes noncash expenses, such as depreciation. This tells investors — and suppliers — whether the company has enough money to pay its bills.

It is particularly significant, Dawes said, given that credit-rating agencies are taking a hard look at companies in the auto industry. Last week, for instance, Standard & Poor’s Corp. downgraded GM and warned that Ford Motor Co. has less leeway than it did a year ago.

After Dawes’ conference call with Wall Street analysts, the company filed a report with the Securities and Exchange Commission that included new details about an accounting investigation the company revealed late last month. At that time, the company identified about $90 million in transactions with Plano, Texas-based Electronic Data Systems Corp. and another information technology firm that might have been accounted for incorrectly.

The audit committee of Delphi’s board of directors has initiated its own review, aided by outside counsel and PricewaterhouseCoopers. The internal review raised questions about when Delphi should have recognized $19.5 million in payments or credits from an unnamed information technology provider in 2000 and 2001. Delphi said it has notified SEC staff of its finding.

Dawes said the company would not file its quarterly report with the SEC, called a 10Q, until the audit committee concludes its investigation and independent accountant Deloitte & Touche signs off.

Separately, Delphi said the SEC requested information related to accounting for pensions and for retiree benefit plans. Dawes noted that several companies have been queried about the assumptions used to calculate present value of future employee benefits.

On Monday, Delphi shares slid 20 cents, or 2.4 percent, to close at $8.24 on the New York Stock Exchange. Delphi shares fell to $8.10 late last year, then climbed sharply to $11.78 in January. Since then, the stock has been on a downward trajectory. Third-quarter revenues reached $6.65 billion, up from $6.56 billion a year earlier. GM accounted for 53 percent of sales. Sales to GM fell by more than $400 million, or 20 percent, to $3.5 billion, while sales to other customers rose more than $500 million, to $3.16 billion.

For the first nine months of the year, Delphi posted a net profit of $66 million, or 12 cents a share, up from a loss of $138 million, or 25 cents a share, a year earlier.

The third quarter is typically a challenging period for auto-parts makers, because most of their automaking customers take at least a couple of weeks off for summer vacations or model-year changeovers.

This year, GM and Ford idled some plants for longer periods in order to unload 2004 models and reduce suffocating inventories. Together with higher prices for commodity materials, many suppliers, such as Delphi, lowered earnings guidance heading into the reporting season.

Delphi expects better results in the fourth quarter: Its expectations range from a loss of $18 million to a profit of $32 million on sales of $7 billion to $7.2 billion with $350 million to $450 million in operating cash flow.

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