GM Earnings Hit by $2.2 Billion Writedown
Tuesday October 15, 5:07 pm ET
By Michael Ellis
DETROIT (Reuters) - General Motors Corp. (NYSE:GM - News) on Tuesday reported a third-quarter net loss after a $2.2 billion write-down of its stake in Italy's Fiat SpA (Milan:FIA.MI - News) , but its shares rose on better-than-expected operating results.
The world's largest automaker, which has used generous incentives to keep its U.S. sales going, also raised its earnings outlook for the year. GM's zero-percent financing deals boosted its U.S. vehicle sales and market share during the third quarter and strong sales of its highly profitable trucks also raised its profit margins.
But due to the stock market meltdown this year, GM said its assets in its U.S. pension plan have dropped about 10 percent this year. As a result, its pension expenses could rise by roughly $1 billion after taxes, or around $1.80 per share, next year based on prevailing discount rates, Chief Financial Officer John Devine said during a conference call.
"The operating performance is better than we thought," said David Bradley, an analyst with JP Morgan Chase. "But this pension issue is going to bite us harder than we thought. The pension numbers are pretty big. I think you're more likely to see (earnings estimate) numbers come down for 2003."
GM shares rose $3.44, or about 10 percent, to close $36.70 on the New York Stock Exchange. Since the beginning of the year, GM has outperformed Ford by about 32 percent, but its shares have fallen in recent weeks due to worries about pension costs and sales.
PENSION EXPENSE GROWS
The pension expense could grow further if GM cuts its targeted annual return on its pension fund from 10 percent currently, Devine said. Each one point cut in its annual assumption would cost it an additional $700 million, Devine said.
GM will take aggressive measures to cut costs next year, but it could prove difficult to offset the higher pension expenses, Devine said.
GM's U.S. pension fund ended 2001 underfunded by $9 billion, and that could grow to more than $20 billion if the fund's assets lose 10 percent this year, the company said. Fitch Ratings said on Tuesday that the pension funding gap for the entire automotive industry could grow to $30 billion by the end of the year, up from $13.9 billion last year.
Due to decades of plant closings and a shrinking work force as its U.S. market share fell, GM now supports about 450,000 retired workers and their spouses in the United States with its pension and post-retirement health care funds, more than two times its U.S. work force of 195,000.
GM reported a net loss of $804 million, or $1.42 per share, for the third quarter, including the Fiat pretax charge of $2.2 billion and other one-time items.
Excluding the charges, GM posted a profit of $615 million or $1.20 per share for the third quarter, up from a profit of $385 million or 85 cents per share in the same period last year. Those results beat Wall Street forecasts that ranged from 85 cents to $1.15 per share, with a consensus forecast of 99 cents, according to research firm Thomson First Call.
GM raised its 2002 earnings target to $6.35 per share, including Hughes and excluding special items, from a previous forecast made in September of $6.10 per share.
However, for the fourth quarter, GM set a target of $1.40 per share. That is the low end of Wall Street forecasts of $1.40 to $1.70 a share, with a consensus forecast of $1.48.
SLOWING SALES
GM officials said last week that U.S. vehicle sales weakened during the first part of October amid signs of a slowing economic recovery and rising consumer anxiety. Some Wall Street analysts have trimmed their earnings forecasts, citing economic indicators showing slowing consumer spending.
Since Detroit-based GM bought a 20 percent interest in Fiat Auto for $2.4 billion in 2000, the Italian automaker has been hit by a sharp slowdown in sales, and has been forced to restructure its operations, including announcing the layoff of about 8,100 workers last week.
Devine said the automaker valued its 20 percent stake in Fiat Auto at $220 million, implying a value for the entire unit of about $1.1 billion.
Fiat SpA has a "put" option to sell its remaining 80 percent stake in the money-losing Fiat Auto to GM in 2004. That potential burden has added to Wall Street concerns over the rising pension costs.
But Devine admitted on Tuesday that the put could be canceled if the ownership of Fiat SpA changed hands, as could be the case if Italian banks take a stake in the struggling company as part of a government-led bailout plan as some Italian newspapers have reported.
"If there's a change in control of Fiat SpA, then the put is automatically eliminated," Devine said, while declining to comment on the Italian newspaper reports.
GM's core North American automotive operations earned $510 million in the third quarter, up from $445 million in the third quarter last year. Cost cutting and strong U.S. sales from its interest-free loan incentives helped offset a fall of 2.2 percent during the quarter on the net price from the sale of new vehicles.
GM earned $351 per car and truck sold to dealers in North America, up from $337 in the third quarter last year.
But the strong North American results were offset by continuing losses from most of its overseas operations, including a loss of $180 million from GM's European automotive unit. |
