DETROIT -- With mounting losses in Europe, out-of-control healthcare costs in North America and slower-than-expected growth in China, General Motors reported disappointing third quarter earnings last week.
GM not only missed Wall Street expectations for the period, it also lowered its earnings projections for the year and faced the cruel reality of a downgraded bond rating.
GM said net incomes rose to $440 million, or 78 cents per share, up from $425 million, or 70 cents per share, during the same quarter last year - significantly less than Wall Street's expectation of 96 cents a share. GM admitted the results were at the low end of its own forecast.
Revenue rose from $43.52 billion in the third quarter of 2003 to $44.86 billion this year.
GM Chairman and CEO Rick Wagoner said GM is struggling with a range of problems - from record-high steel costs to soaring health-care inflation.
"Our automotive earnings in the third quarter reflect these challenging market conditions and were frankly disappointing," Wagoner said.
Wagoner said it is the first time in a decade GM has lost money in its global automotive business. GM's global automotive business reported a loss of $130 million in the third quarter, compared with a net income of $34 million in the prior-year period.
GM did manage to gain market share in all four regions of the world and increase net income by 3.5 percent compared to the third quarter of 2003. But the increase was less than expected.
Double-digit health-care inflation is the leading issue in North America.
GM is considered the nation's largest provider of private health care. Wagoner said U.S. health costs continue to hurt profitability. GM spent $4.8 billion on health care in 2003 and expects those expenses to rise by "double-digits" in the near future.
"We have to move more aggressively to address some frankly chronic, but difficult-to-address cost issues," Wagoner said.
GM, which raised its earnings outlook for the year three months ago from $6 to $6.50 a share to $7 a share, went back to its original, lower projections.
The debt-rating agency Standard & Poor's Corp. cut GM's long-term credit rating to "BBB-minus" status, its lowest investment-grade rating. S&P said its downgrade reflects increased concerns about GM's profit potential in its automotive business, increased competition and soaring oil prices.
"GM has been unable to achieve satisfactory profitability," said S&P analyst Scott Sprinzen in a report released last week.
The earnings report came just after GM Europe announced it is slashing up to 12,000 jobs over the next two years - about one-fifth of its European workforce. Ninety percent of those cuts will take place next year, GM said.
GM Europe officials said sluggish demand means annual costs at European operations have to be reduced by $600 million by 2006.
GM lost $236 million in Europe in the third quarter, despite gaining a half point of market share.
"With losses since 1999 and no reasonable indication that market or economic conditions will improve substantially in the coming years, we have no other choice than to take tough steps to ensure our long-term success," General Motors Europe Chairman Fritz Henderson said in a statement.
Henderson did not discuss details of possible plant closures.
GM employs about 63,000 people at 11 production and assembly plants in Europe.
"The lack of industry growth, the pricing environment and the competitiveness of the market do not allow us to grow fast enough to offset the cost base we have today," Henderson said. "We are not forecasting any demand growth."
Earnings from GM's finance arm, General Motors Acceptance Corp. (GMAC), helped offset the news in Europe. Profits at GMAC continued to be strong, compared to the prior year. GMAC earned $656 million, up from $630 million in the year-ago quarter, its ninth consecutive quarter of improved earnings.
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