Delphi Reports 12%Pro Forma Increase in Quarterly Earnings
15 April 1999
Delphi Automotive Systems Reports 12 Percent Pro Forma Increase in Quarterly Earnings
Today Announces Significant Gas Direct Injection Sales Contract
TROY, Mich., April 15 -- A strong North American market
coupled with aggressive cost-reduction more than offset the impact of the
economic downturn in South America as Delphi Automotive Systems Corporation
today reported net income for the first three months of 1999 grew
to $284 million.
Historical net income for the first quarter of 1998, as measured under
generally accepted accounting principles (GAAP), was $236 million. However,
the $236 million does not reflect the impact of the terms of the separation
agreement between Delphi and General Motors Corporation (GM). After including
the effect of the separation agreement, pro forma first quarter 1998 net
income was $254 million. Delphi's first quarter 1999 net income of $284
million reflects a 12 percent increase over the 1998 level of $254 million.
Earnings per share calculations are complicated by the changes in shares
outstanding related to the steps involved in full separation from GM.
Currently, Delphi has 565 million shares outstanding, reflecting 100 million
shares issued in an initial public offering in February 1999, and 465 million
shares owned by GM. Management considers 565 million shares to be the most
widely used figure for analyzing Delphi's earnings per share. (Under GAAP,
the shares issued in connection with the initial public offering of Delphi
common stock would be excluded from 1998 and fractionally included in 1999,
resulting in the use of 465 million shares in 1998 (EPS $0.51) and 521 million
shares in 1999 (EPS $0.55).) Based on 565 million shares outstanding, 1999
earnings of $284 million and pro-forma 1998 earnings of $254 million, earnings
per share were $0.50 for 1999, and $0.45 for 1998, an improvement of
$0.05 over the same period in 1998.
"Our first-quarter results reflect continued progress toward realization
of our near-term and long-term business strategies," said J.T. Battenberg III,
Delphi's chairman, chief executive officer and president.
"Delphi continues to take cost out of operations through reductions in
material and manufacturing costs, and re-alignment of the product portfolio.
We expect further margin enhancement over the long term as we continue to
improve operations while realizing the benefits of expanded sales to global
vehicle manufacturers as a result of the separation from GM. Our objectives
remain 5 percent net income margin, 10 percent annual non-GM sales growth and
12.5 percent RONA (Return on Net Assets)," said Battenberg.
Sales
Consolidated net sales were $7.5 billion for the first three months of
1999 compared to $7.6 billion for the first three months of 1998. This
reflects growth in sales revenue from ongoing operations and strong North
American sales, offset by the impact of businesses divested in late 1998 and a
decline in South American sales. Non-GM sales for the first three months of
1999 were up 12 percent -- after adjusting to eliminate the 1998 sales of
Delphi's seating, lighting, coil spring, and several smaller businesses, which
were divested in 1998.
"South America has been severely impacted by the crisis in Asia and Russia
as well as the devaluation of the Brazilian Real," said Volker Barth,
president of Delphi South America. "1999 volume projections are forecast to
come in below 1998 levels, effecting sales and profitability, primarily as a
result of Brazil's maxi-devaluation. However, Delphi remains committed to the
region and our customer base. We believe the long-term fundamentals have not
changed. Mercosur remains a market of significant growth potential," said
Barth.
Growth -- New Gas Direct Injection Contract Announced
Announced today: Delphi won an order in March valued at over $100 million
average annual revenue, to develop and supply a direct injection gasoline
engine management system for a future GM vehicle program. During the quarter,
Delphi's Dynamics & Propulsion sector earned new contracts from GM that total
approximately $650 million in average annual revenue. "These contracts
demonstrate our largest customer's confidence in our ability to innovate and
provide product differentiation and new customer value," said Battenberg.
Battenberg also noted that Delphi continues to receive greater numbers of
bid opportunities, which he said is indicative of non-GM customer acceptance
of products and technology from an independent Delphi. "Business bookings for
the quarter reflect our strong business retention and growth efforts with GM
and other customers," said Battenberg.
Delphi's future business continued to grow during the quarter, with
significant contracts awarded by the following European and Asian vehicle
manufacturers: Volkswagen, Renault, Peugeot, BMW Rover, Volvo, Daewoo, Isuzu,
and Honda. Program timing and contract details were not disclosed at the
request of the customers.
"Based on new business won this quarter, we remain confident in our
forward revenue plans," said Battenberg.
Cost Reduction Initiatives
First-quarter cost reductions reflected the benefit of the previously
announced seating, lighting, and coil spring divestitures, and infrastructure
improvements. Ongoing material and manufacturing cost reduction initiatives
more than offset the impact of a significant market downturn in South America.
Further, Delphi benefited during the first quarter from previously implemented
workforce and infrastructure reductions in South America consistent with
declining volumes.
Balance Sheet/Cash Flow
Delphi's balance sheet at the end of the quarter reflected a cash balance
of $1.1 billion, and debt and equity balances of $1.9 billion and $3.4
billion, respectively. "Significant improvement in liquidity allows
continuing pursuit of our objectives for pension funding, while preserving
flexibility for strategic growth initiatives," said Alan Dawes, Delphi's chief
financial officer.
Bond Issue
Later today, Delphi's investment banks will announce details of a term-
debt offering, which will replace existing short-term bank facilities with
longer term financing.
Portfolio Restructuring
In the first quarter, Delphi continued its process of portfolio
restructuring aimed at improving margins, diversifying the customer base, and
making investments in advanced technologies.
"We continue to establish strategic partnerships and complete acquisitions
with the goal of accessing new technology and technical capability, expanding
customer relationships, and enhancing our global footprint. Our first quarter
activities demonstrate our focused and aggressive portfolio improvement
strategies," said Battenberg.
Delphi expects international expansion to be a key driver of future
growth. During the quarter, Delphi announced the opening of a wholly owned
wiring harness facility in Morocco, in addition to a new facility to supply
HVAC and chassis customers in India. In March, Delphi announced a strategic
partnership with Gabriel de Mexico S.A. de C.V. to supply automotive damper
and suspension modules to both vehicle manufacturers and the aftermarket in
Mexico, which illustrates Delphi's commitment to footprint alignment,
portfolio and market channel expansion.
Seeking to enhance its position as a technology leader, Delphi announced
plans to invest approximately $63 million in its Kokomo, Ind., operations to
introduce the latest technology in custom automotive integrated circuits.
Further, Delphi announced plans to make a significant investment in its
Sandusky, Ohio facility to produce advanced wheel spindle bearings using lean
manufacturing concepts.
Delphi and CD Radio announced an agreement to design and market an
original equipment three-band audio system capable of processing digital
satellite signals.
Delphi broadened its position as truck equipment technology leader,
announcing a strategic alliance with Allied Signal to develop and manufacture
next generation ABS braking systems for the heavy duty truck market.
Finally, in response to the economic crisis in South America, Delphi has
re-sized the Delphi South America organization and has idled or sold selected
manufacturing facilities in the region.
Sector Financial Results ($ millions)
Q1 1999 Q1 1998
Q1 1999 Q1 1998 Operating (Pro-Forma Basis)
Sector Sales Sales Income Operating Income
Electronics & Mobile
Communication $ 1,353 $ 1,283 $ 158 $ 129
Safety, Thermal &
Electrical
Architecture 2,713 3,090 216 211
Dynamics &
Propulsion 3,534 3,366 124 97
Other(1) (131) (116) (41) (75)
Total $ 7,469 $ 7,623 $ 457 $ 362
(1) Corporate and intra-company items
Full Separation
General Motors Board of Directors on Monday, April 12 approved the
complete separation of Delphi from GM by means of a tax-free spin-off.
"With regard to stockholder initiatives, GM's decision to complete full
divestiture of its ownership stake in Delphi in the second quarter allows us
to begin immediately to execute a business strategy aimed at maximizing
shareholder value," said Battenberg.
"Complete separation from GM will help Delphi attract non-GM sales growth,
strengthen our ability to partner and acquire strategic businesses, and
continue to improve relations with our approximately 198,000 worldwide
employees," said Battenberg.
Delphi Automotive Systems, with headquarters in Troy, Mich., USA, is a
world leader in automotive component and systems technology. Delphi's
3 business sectors -- Dynamics and Propulsion; Safety, Thermal and Electrical
Architecture; and Electronics and Mobile Communications -- provide
comprehensive product solutions to complex customer needs. Delphi has
approximately 198,000 employees and operates 168 wholly owned manufacturing
sites, 40 joint ventures and 27 technical centers in 36 countries. Regional
headquarters are located in Paris, Tokyo and Sao Paulo. Delphi can be found
on the Internet at http://www.delphiauto.com .
Forward Looking Statements
Delphi is subject to a number of factors that could cause actual results
to differ from those anticipated in forward looking statements. All
statements contained in this press release that are forward looking statements
(including the possible benefits that could be achieved from a complete
separation from General Motors) which, in certain instances, are identified by
the words "expect", "anticipate," "estimate," "project" and similar
expressions, are subject to numerous risks and uncertainties, many of which
are outside Delphi's control. Accordingly, actual results may differ
materially from those suggested in these forward looking statements. Further
information concerning such risks and uncertainties is contained in Delphi's
filings with the U.S. Securities and Exchange Commission, including its Annual
Report on Form 10-K for the year ended December, 31, 1998.
HIGHLIGHTS -- Three months ended March 31, 1999 vs. pro forma three months
ended March 31, 1998 comparison
Three Months Ended
March 31,
1999 1998 (a)
(in millions, except
per share amounts)
Net sales:
General Motors and affiliates $ 5,853 $ 6,105
Other customers 1,616 1,518
Total net sales 7,469 7,623
Less operating expenses:
Cost of sales, excluding items listed below 6,391 6,727
Selling, general and administrative 384 334
Depreciation and amortization 237 200
Operating income 457 362
Less interest expense 24 64
Other income, net 25 79
Income before income taxes 458 377
Income tax expense 174 123
Net income $ 284 $ 254
Gross margin 14.4% 11.8%
Operating income margin 6.1% 4.7%
Net income margin 3.8% 3.3%
Basic and diluted earnings per
share - actual(2) $ 0.55 N/A
Basic and diluted earnings per
share - pro forma(3) $ 0.50 $ 0.45
(1) Results of operations for the three months ended March 31, 1998 have
been adjusted to reflect the impact of the terms of our separation
from GM. Overall the adjusted results reflect the net effect of
lower employee benefit costs and higher other costs associated with
operating Delphi as a stand-alone company. See the Reconciliation
of actual to pro forma results for additional information.
(2) Actual earnings per share are calculated using the weighted average
shares outstanding during the period, resulting in 521 million shares
outstanding during the three months ended March 31, 1999.
(3) Pro forma earnings per share are presented as if the initial public
stock offering of 100 million shares took place on January 1, 1998,
resulting in 565 million shares outstanding during both periods
presented.
HIGHLIGHTS -- Three months ended March 31, 1998 -- Reconciliation of
actual to pro forma results
Three Months Ended March 31, 1998
Actual Adjustments Pro forma
(in millions, except per share amounts)
Net sales:
General Motors and affiliates $ 6,105 -- $ 6,105
Other customers 1,518 -- 1,518
Total net sales 7,623 -- 7,623
Less operating expenses:
Cost of sales, excluding
items listed below 6,789 $ (62)(a) 6,727
Selling, general and
administrative 300 34 (a) 334
Depreciation and
amortization 200 200
Operating income 334 28 362
Less interest expense 64 -- 64
Other income, net 79 -- 79
Income before income taxes 349 28 377
Income tax expense 113 10 (b) 123
Net income $ 236 $ 18 $ 254
Basic and diluted earnings
per share with 465 million
shares outstanding $ 0.51 N/A
Basic and diluted earnings
per share with 565 million
shares outstanding N/A $ 0.45
(a) The pro forma effect of lower employee benefit costs, due to GM's
retention of certain retiree benefit obligations, favorably impacts
both cost of sales and selling, general and administrative expenses.
Selling general and administrative expenses are also unfavorably
impacted by the estimated incremental costs associated with operating
Delphi as an independent company.
(b) Income taxes were determined in accordance with SFAS No. 109,
"Accounting for Income Taxes." For purposes of this pro forma
presentation only, adjustments necessary to record the income tax
effect of the pro forma adjustments assume a combined federal and
state income tax rate of 38%.
HIGHLIGHTS -- Liquidity and capital resources
(dollars in millions)
BALANCE SHEET DATA:
March 31, December 31, December 31,
1999 1998 1998
GAAP GAAP Pro forma
Cash and marketable securities $ 1,134 $ 1,000 $ 2,062
Debt 1,886 3,500 3,500
Net Liquidity $ (752) $ (2,500) $ (1,438)
Pension obligations $ 2,208 $ 2,180 $ 2,180
Total stockholders' equity $ 3,351 $ 9 $ 3,171
RECONCILIATION OF NET LIQUIDITY:
GAAP net liquidity at December 31, 1998 $ (2,500)
Settlement of accounts receivable from GM (1,600)
Extension of payment terms for accounts
receivable from GM (2,100)
Settlement of note payable to GM 3,141
Initial public offering proceeds 1,621
Pro forma net liquidity at December 31, 1998 (1,438)
Net income $ 284
Depreciation and amortization 237
Capital expenditures (235)
Other, net 343
Adjusted operating cash flow less capital
expenditures 629
Other investing activities 57
GAAP net liquidity at March 31, 1999 $ (752)