GM Profits Up 42% in Quarter, Off 11% in Year : Firm Cites Investment Costs for Decline in ’85
Despite costly sales incentive programs, General Motors’ profits in the fourth quarter rose a whopping 42.8% to $1.25 billion, compared to the strike-plagued quarter the year before, the giant auto maker reported Monday.
But for all of 1985, GM said its earnings fell 11.5% to $3.99 billion from 1984’s record $4.52 billion. GM attributed the decline in part to costs of its “strategic investments,” including the $5.1-billion acquisition last year of El Segundo-based Hughes Aircraft. Still, GM’s earnings for last year were its second highest ever--thanks partly to record earnings of $1.02 billion at its financing subsidiary, General Motors Acceptance Corp.
The drop in 1985 earnings came despite record annual sales of $96.37 billion, which were up 14.9% from 1984. GM claimed that its sales increase was big enough to help it regain its traditional position as the world’s largest industrial corporation. GM spokesman Bill Winters said GM should retake the No. 1 ranking on Fortune magazine’s list of the 500 biggest companies for the first time since 1978, edging out Exxon, which recently reported sales for 1985 that were slightly lower than those posted by GM.
Profit-Sharing Plans
GM also said that $180.3 million of its profits from U.S. operations will be split among 550,000 of its U.S. workers as profit-sharing bonuses, but another $219 million in bonuses out of worldwide profits will be shared by 5,749 top executives. Leaders at the United Auto Workers were quick to criticize the relatively small size of the profit-sharing pool available for hourly workers.
“We are naturally disappointed by the performance of the profit-sharing provision and by the amounts our members at GM will receive,” said Donald Ephlin, director of the UAW’s GM department. “We expect that a high priority will be given to making appropriate alterations to the profit-sharing formula in the 1987 national negotiations between the UAW and General Motors,” he added.
GM closed its purchase of Hughes at the end of 1985, and so the defense contractor’s earnings were not included in GM’s financial results. But on a pro-forma basis, GM’s new Hughes Electronics subsidiary, which includes Hughes Aircraft and GM’s Delco Electronics division, would have posted combined earnings of $488.6 million in 1985, down 5.6% from 1984’s $517.8 million.
GM said a decline in Hughes Aircraft earnings--due to problems in its missile operations, high development costs on its commercial satellites and increased quality control efforts--would have offset earnings gains at Delco Electronics. GM said that Hughes Aircraft, which had been privately owned, had a backlog of $11.3 billion in defense and space contracts at the end of 1985, roughly double its annual sales, and reported that new contracts awarded during the year were worth more than $7.3 billion.
GM’s big Electronic Data Systems computer services subsidiary, meanwhile, which was acquired in 1984, reported record earnings of $189.8 million on sales of $3.44 billion for 1985, more than double the Dallas-based operation’s pro-forma 1984 earnings of $80.7 million on sales of $947.4 million.
EDS, which was acquired by GM to integrate and strengthen the auto maker’s data-processing operations, has undergone a boom in sales to GM and its far-flung divisions since the merger and is now taking the lead in developing new computer technologies to help speed up the process of automating GM’s manufacturing facilities.
Industry analysts said Monday that GM’s fourth-quarter net earnings were better than they had expected because of the relatively small amount in taxes paid by GM and because of the strong earnings from GMAC.
Harvey Heinbach, automotive analyst with the Merrill Lynch investment firm, also noted that the effect on GM’s earnings from its costly cut-rate car financing programs in the fourth quarter was apparently offset by the auto maker’s price hikes on 1986 models. He added that many of the incentives were offered on expensive cars with big, built-in profit margins, so even with bargain financing, the increase in sales volume resulting from the incentives added to GM’s bottom line.
Heinbach also observed that the first quarter of 1986 could be better than many analysts have been anticipating. Some analysts have been concerned that GM is currently building more cars than it can sell and that it will be forced to extend its incentive programs to spur sales, depressing first-quarter earnings. But Heinbach thinks the incentives are working to lower GM’s excess inventories.
“The incentives have been helpful in letting GM stay close to its ambitious first-quarter production schedules,” Heinbach said. “So I think the first quarter should be fairly steady in comparison with last year.”
