GM sees a tough quarter ahead
By Jefferey McCracken
Detroit Free Press
DETROIT — General Motors Corp. warns that it will struggle to make any money in the first three months of the year and might even lose money on its North American car and truck-making operations.
The automaker's grim prediction for the first quarter came yesterday as it announced its financial results for the full year and the last three months of 2004.
GM had an up-and-down 2004. The reasons for it — and the grim forecast in early 2005 — mostly boil down to two issues: healthcare and banking.
Increasingly, any discussion of GM is less about cars and trucks and more about its exploding medical costs and the record profits it makes at GMAC through vehicle loans, mortgages and insurance.
For the last three months of 2004, GM's growing medical coverage tab for 1.1 million workers, retirees and dependents seemed to largely overwhelm the financing profits as GM earnings tumbled by 37 percent.
GM made $630 million, or $1.11 a share, in the October-December period, compared with $1 billion, or $2.13 a share, in the fourth quarter of 2003.
On the back of increased loans and growing insurance sales, GMAC posted quarterly earnings of $611 million — meaning that accounted for about 96 percent of GM's profits in the fourth quarter.
But weighing down GM is the fact that its healthcare tab for 2004 grew by $400 million — to $5.2 billion — which executives there have blamed on rising prices and increasing use of prescription drugs. GM expects another $400 million jump in 2005, plus another $1 billion hit as the automaker must also account for future healthcare expenses for future retirees.
"Healthcare has been a real drag on North America and has been for several years, both from a cash standpoint and an earnings standpoint," said GM vice chairman John Devine.
In years past, GM was able to hold its healthcare inflation below the national average, but it was not as successful at that in 2004 and says it will be even less successful in 2005.
For all of 2004, GM profits dipped slightly. Again, higher healthcare costs are blamed. But the automaker also had disappointing vehicle sales in the United States and growing financial losses in Europe. The automaker earned $3.7 billion, or $6.51 a share, for 2004, down from $3.8 billion, or $7.14 a share, in 2003.
GM has said it expects to make $4 to $5 a share in 2005, a big drop from the last two years.
Further alarming to Wall Street is GM's break-even outlook for the first part of 2005, well below expectations.
The next 12 months — or longer — could be hurt by the fact that GM's lineup of full-size trucks, including the Chevy Silverado, Chevy Suburban and Cadillac Escalade, are in the last years before a redesign, which historically means falling sales or greater rebates.
In North America, GM made $1.17 billion, up slightly from $1.15 billion in 2003.
For 2005, GM hopes to post a profit of $500 million in North America, a notable drop from 2003 or 2004.
GM's results were boosted by record earnings at its finance arm, GMAC, which improved its profits for the 10th consecutive year. Devine said GMAC was helped by growth at its mortgage and insurance businesses.
GMAC reported 2004 profits of $2.91 billion, up from $2.79 billion. GMAC accounted for 80 percent of GM's profits in 2004, up from about 73 percent in 2003.
