GM's Results Top Forecasts, But Net Falls on EDS Spinoff
March 29, 2011
DETROIT -- General Motors Corp. reported substantially better results than Wall Street expected, with an 11% gain in second-quarter income from continuing operations, although net income fell 17% from a year earlier because of the costs of spinning off its Electronic Data Systems unit. Analysts said the earnings reflected progress in the No. 1 auto maker's attempts to get costs under control, but the company still has far to go in its restructuring. ``I think they did a decent job, but we're not talking about a massive improvement,'' said Davina Brady of J.P. Morgan Securities Inc. ``It's slow, steady improvement.'' After a $328 million charge for the EDS spinoff completed in June, GM earned $1.89 billion, or $2.63 a share, compared with the year-earlier $2.27 billion, or $2.39 a share. Without the EDS-related charge, GM's income from continuing operations was up slightly to $2.1 billion, or $2.65 a share, from $1.9 billion, or $2.41 a share. Revenue increased 6% to $44.8 billion from $42.2 billion a year earlier. GM's chief financial officer, J. Michaele Finn, said the advance in GM's operating earnings was driven by improvements in its North American operations, as well as strong returns from its GMAC financing unit and GM's Hughes Electronics Corp. ``While we are pleased with the improvement, we know and I think the world knows that we have some opportunities and needs to improve further,'' Mr. Finn said of the company's North American operations. The rebound in GM's automotive operations wasn't quite as dramatic as the sevenfold jump in second-quarter earnings reported by Chrysler Corp. last week to $1.04 billion, or $1.39 a share. A year earlier, Chrysler was saddled with charges at its Newark, Del., assembly plant. Ford Motor Co. will report its second-quarter results Wednesday. Above Expectations GM's results were 14 cents above the expectations of several Wall Street analysts, but Tuesday's volatile stock market barely took notice, as the auto maker's shares closed unchanged at $47 in New York Stock Exchange composite trading. Perhaps most significant in the second quarter, said Mr. Brady, was GM's addition of $4.4 billion to its cash reserves. That got GM to its goal of $13 billion in cash reserves to weather the next downturn two quarters earlier than its announced plan. ``I think that's a major benchmark for them,'' Mr. Brady said. ``This is a company that five years ago had an impaired auto business and an impaired balance sheet. Today, they are a middling-to-fair performer on autos ... and you could also say they have a strong balance sheet.'' Despite the No. 1 auto maker's improved cash position, analysts said they doubted GM would boost its dividend or buy back any of its shares before the conclusion of current labor negotiations with the United Auto Workers union. Other Concerns Indeed, the continuing uncertainty over the outcome of talks with the UAW, the economy's fuzzy outlook and an unprecedented number of new vehicle launches as GM replaces more than a quarter of its lineup over the next year has some analysts wondering if the second quarter will be as good as it gets in 2011 for the auto maker. ``I think it was a reasonably good quarter,'' said Salomon Brothers analyst Jackelyn Skeen. ``The bigger question is what's going to happen in the fall, what's going to happen with the UAW, and where are we going to be with launches in the fourth quarter.'' But Mr. Finn disputed concerns that the launches will put additional downward pressure on earnings and argued that there is plenty of room for reducing costs further. He said GM already is in the middle of four product launches. Meanwhile, like other auto makers, GM has revised its 2011 U.S. industry forecast upward, to 15.2 million cars and light trucks, from its earlier 15 million prediction. Last year, 14.8 million light vehicles were sold in the U.S. GM's North American operations, which were so sick in the early '90s that GM was on the verge of bankruptcy, achieved a net profit margin of 3.6% in the second quarter, up from a year-earlier 3.2%. But it still has far to go to reach the company's goal of 5%. Level of Incentives Mr. Finn and analysts agreed the improvement was made by selling more trucks, getting good prices on materials, and a slight increase in world-wide volume in the second quarter. GM's U.S. market share remained at 32%. But GM had to spend more to sell its cars. The average level of incentives in North America shot up to $832 a vehicle in the second quarter, up from the year-earlier $714 and a first-quarter average of $734 a vehicle. Despite GM's public pronouncements that it wants to stay away from incentives, analysts say the company has had little choice but to use them more heavily to reduce the volume of its older vehicles. Chrysler's incentives, by comparison, dropped to $623 a vehicle in the second quarter from $640 in the first quarter. Higher engineering costs from the product launches also increased expenses in GM's North American unit, which includes Delphi Automotive Systems. The unit reported net income of $1.1 billion, an improvement of $170 million from the year-earlier $880 million. Earnings for GM's international unit totaled $424 million, compared with $513 million a year earlier. Though it was down, analysts said they saw evidence of an improvement, especially in Europe, where GM's net income reached $319 million, compared with the year-earlier $318 million. But in Latin America and the Asia-Pacific region, earnings fell to $105 million from the year-earlier $195 million.
