GM Earnings Drop 30% but Beat Expectations

July 17, 2003

DETROIT — General Motors Corp., the world's largest automaker, Thursday said second-quarter earnings plunged 30 percent due to the rising cost of consumer incentives and the shutdown of a key plant hit by a tornado.

But the results were much better than Wall Street had expected, and GM said it was now more optimistic about the outlook for the full year.

The company said second-quarter net earnings fell to $901 million, or $1.58 per share, from $1.3 billion, or $2.43 per share, a year earlier. Analysts' average earnings estimate was $1.19 per share, according to Reuters Research, a unit of Reuters Group Plc.

"It's a good deal better than the consensus," said David Healy, an analyst with Burnham Securities. However, he said a sharp drop in GM's core automotive earnings was a bit surprising.

The company's automotive operations earned just $140 million in the quarter, down from $1.07 billion a year earlier.

GM said it expects to beat analysts' average estimate of 50 cents per share for the third quarter, excluding its Hughes Electronics Corp. unit and any one-time items.

It also said full-year earnings could range from $4.50 a share -- analysts' average estimate -- to as much as $5 per share, excluding Hughes and special items.

Previously, GM said it might not meet its earnings target of $5 per share this year due to the high cost of consumer incentives.

Part of the reason GM was able to beat Wall Street second-quarter forecasts was the company's decision to cut its reserves for the costs of vehicle warranties by $199 million after taxes, or 36 cents per share.

Nearly all of GM's second-quarter earnings came from its finance unit, General Motors Acceptance Corp., which earned a record profit of $834 million in the period, up from $431 million a year earlier. GMAC's mortgage operations, which benefited from low interest rates, earned $415 million.

GM rival Ford Motor Co. (F) also said most of its second-quarter earnings came from its captive finance unit. On Wednesday the world's No. 2 automaker reported earnings of $417 million, down 27 percent from a year earlier. Its automotive operations earned just $3 million before taxes.

Detroit's escalating price war has slashed profits at the U.S. automakers. DaimlerChrysler AG warned last month that its Chrysler unit would post an operating loss of about 1 billion euros ($1.20 billion) in the second quarter due to the cost of consumer incentives.

GM's average incentives per vehicle sold in the United States totaled $3,934 in June, up more than $1,300 from a year earlier, according to industry analyst Autodata.

GM's second-quarter revenue slipped slightly, to $48.31 billion from $48.34 billion a year earlier.

GM said its earnings were hurt by a tornado in May that caused severe damage to an Oklahoma City plant that makes highly profitable mid-size sport utility vehicles. The plant had to be shut down for repairs and did not reopen until late June.

The tornado damage and loss of production reduced second-quarter earnings by $168 million after taxes, or 30 cents per share, GM said.

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