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GM Net Income Down – But Earnings Up Before Taxes

Maker increases projected losses in Europe.

by on Oct.31, 2012

GM continues to struggle in Europe, even as the home market rebounds.

General Motors reports it earned $1.5 billion during the third quarter of 2012, a 14.5% decline in net profits, though the maker’s earnings before interest and taxes, or EBIT, rose nearly 5%.

The maker’s latest quarter reflected a generally strong performance in a U.S. market that has seen a sharp upturn in car sales this year that has defied skeptics’ forecasts. And the maker did well in Asia and most other international operations. But GM was hammered by the collapse of the European automotive market and the ongoing problems at its German-based Opel subsidiary.

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“GM had a solid quarter because customers around the world love our new vehicles and we’re also seeing green shoots take hold on tough issues like complexity reduction, pensions and Europe,” said Chairman and CEO Dan Akerson. “We are going to keep playing offense with growth products like the Chevrolet Onix, Opel Mokka and Cadillac ATS and continue to systematically address business risks.”

Despite the decline in net earnings, which worked out to 93 cents a share, the maker significantly beat Wall Street expectations.  Industry analysts had collectively anticipated the maker would come in at around 60 cents a share. A year ago, net income was $1.7 billion, or $1.03 a share.

Not surprisingly, the maker put a spotlight on its EBIT numbers, which jumped $100 million, year-over-year, to $2.3 billion for the July to September quarter.  The maker noted it had about $250 million more in income tax expenses during the third quarter and slightly higher interest costs which impacted net income negatively.

Revenues for the latest quarter reached $37.06 billion, a 2% increase.

“Fundamentals of GM’s operation in the U.S. remain…positive,” said Jesse Toprak, Senior Analyst at TrueCar.com. But, he noted, “European operations continued to drag down profitability with no dramatic improvements expected in the near future.”

GM’s performance in the North American market was solid but there were some problems, nonetheless. North American income came to $1.8 billion compared with $2.2 billion a year earlier.  While sales were up, the maker’s market share slipped by a full 2 percentage points – to 18.1% — in large part due to the rebound by Japanese leaders including Toyota, Honda and Nissan. That had been widely anticipated as the makers recovered from the inventory shortages that followed Japan’s March 2011 earthquake and tsunami.

On the positive side, GM saw higher transaction prices on a wide range of products – including its large pickups.  And it was able to reduce incentives by 3.6% during the latest quarter, to an average $3,083 per vehicle sold in the U.S. But it also was hit by shifting demand as American consumers downsized to higher-mileage but lower-price vehicles.  As a result, its overall transaction prices dipped by 0.1% for the quarter, according to TrueCar data.

Also on the upside, GM saw an 88.8% jump in income in its Asia/Pacific region, from $365 million during the third quarter of 2011 to $689 million in the latest three-month period. It generated especially strong numbers in Korea but also continued to gain ground in China where its sales have been running at a record pace this year.

The albatross around the maker’s corporate neck, however, is Europe, where the maker continues to struggle for a turnaround.  Much of senior management was ousted earlier this year, Vice Chairman Steve Girsky now overseeing efforts to rein in losses GM now forecasts will run between $1.5 billion and $1.8 billion for all of 2012 – though the continuing decline of European auto sales has further complicated that effort, analysts warn.

This will be the 14th consecutive year GM of Europe has operated in the red.  The parent company has already laid out plans to cut at least one assembly plant though that is not likely to fully resolve its excess capacity problem – even if a wave of new products such as the 2013 Opel Adam prove successful. And in light of rival Ford Motor Co.’s decision to close three European plants, GM is coming under increasing pressure to both expand and speed up its European turnaround effort.

If there was a positive side to the European crisis it was that the latest quarterly loss of $478 million was also a bit smaller than analysts had been anticipating

“While we still have a lot of work to do, especially in Europe, it is encouraging to see our results begin to reflect the discipline we are bringing to bear on the overall business,” said Senior Vice President and CFO Dan Ammann in a prepared statement.

The latest quarterly net earnings were hurt by $200 million lower pension income and a $300 million rise in warranty and related costs.  On the other hand, GM’s costs for materials and shipping dipped by $200 million.

The maker was the last of the Detroit Big Three to report earnings. Chrysler’s third-quarter net income rose 80%, to $381 million, it announced on Monday. Yesterday,     Ford revealed it made $1.63 billion for the July – September quarter, down a whisker from the $1.65 billion net a year earlier.

By comparison, Japanese makers are expected to show big gains as they recover from the March 2011 Japanese natural disaster. Honda reported its earnings were up 36%, to $1 billion.

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