GM Earnings Decline 65%, Beating Low Expectations

Amid a continuing drop in U.S. vehicle sales and losses in Europe and Japan, General Motors Corp. reported Tuesday that second-quarter profit fell 65% to $610 million.

Earnings were $1.26 a share, beating analysts’ consensus estimate of $1.14 a share, according to First Call/Thomson Financial. Profit for last year’s second quarter was $1.75 billion, or $2.93 a share.

GM took a one-time restructuring charge of $133 million for Japanese truck maker Isuzu, of which GM owns 49%, bringing net income to $477 million for the quarter, or $1.03 a share, down 74% from a year earlier.

Second-quarter revenue was $46.1 billion, down from $48.7 billion in the second quarter of 2000.

“We had a reasonably solid quarter considering lower North American production,” GM Chairman Jack Smith said.

GM reduced production in the second quarter to make up for inventory piling up on dealers’ lots. For that reason, Wall Street had not expected sizzling results.

“GM beat low expectations as second-quarter production schedules stabilized after a chaotic first quarter,” said John Casesa, auto analyst with Merrill Lynch in New York. “In short: middling results, which are reflected by the stock’s middling valuation.”

GM reduced production in the first quarter by 20% and in the second quarter by 13% to clear out its backlog of unsold vehicles. That has helped set an optimistic tone for the second half of the year.

“The view from here is a positive one. Inventory is back in line, and production seems back on line,” said Richard Hilgert, an auto industry analyst in Detroit with the brokerage firm First of Michigan, a unit of Fahnestock & Co. “The economy has stabilized and should at least sustain a market in the low 16 million, so it should be a pretty good year,” Hilgert said.

Industry experts are predicting U.S. auto sales this year of 16 million to 16.5 million, making it the third-best year on record--an important measure in an industry that is considered a bellwether of the nation’s economy as a whole.

GM and other domestic auto makers are operating in an environment of severe price competition in the U.S., made even more keen by the strength of the U.S. dollar. With the Japanese yen weakening 9% against the dollar in the last six months, Japanese auto makers can charge less for their vehicles in this country, putting pressure on domestic manufacturers’ profits.

The quarter was marked by GM paying off its investment in Japanese truck maker Isuzu, GM Chief Financial Officer John Devine told analysts and reporters in a conference call. “GM will no longer record any share of Isuzu operating losses,” Devine said.

GM has invested more than $600 million in Isuzu, which contributed a $47-million loss to GM’s bottom line last quarter. That was offset largely by GM’s 20% stake in Suzuki, which contributed $12 million, and 20% share of Fuji Heavy Industry, maker of Subaru cars, which contributed $29 million to GM’s modest profit of $12 million in Asia.

GM Europe continued to report bad news, with a $154-million second-quarter loss, worsening from $86 million in first-quarter red ink and plunging from a profit of $166 million in the second quarter of last year.

“This is not an acceptable result. Our mix is unfavorable, both by country and product line,” Devine said. The mix of GM vehicles does not include a sufficient proportion of higher-margin large cars, he said. The unfavorable country mix refers to declining sales in Germany and the United Kingdom, which offset positive results in Italy, France and Spain.

Earnings in Europe were “below our expectation as pricing worsened and both product and country mix went against GM,” said Merrill Lynch’s Casesa. “On balance, European results are still worsening at GM.”

GM will announce further restructuring initiatives for Europe later this year to add to the moves announced in December, which included the closure of a factory in Britain.

GM stock closed at $65.99, down $1.05 a share in New York Stock Exchange trading.