GM roars past forecasts

NEW YORK (CNNMoney.com) -- General Motors on Tuesday reported second-quarter earnings that were much better than expected as its embattled U.S. auto operations returned to the black after more than two years of losses.

The nation's No. 1 automaker saw its core North American auto operations report income from continuing operations of $78 million in the quarter, excluding items, its first profit in that key unit since the end of 2004.

The unit had a loss of $94 million on that basis in the year-earlier period.

Since the beginning of 2005, the company's North American operations had total net losses of $12.9 billion. And even with the operating profit in the second quarter, charges related to a bankrupt auto parts maker it used to own and restructuring caused a narrow $39 million net loss. But the operating profit was a welcome relief for a key U.S. company that has struggled to turn itself around.

Since the end of 2004, the company has seen its share of U.S. auto sales fall to 23 percent from 27.5 percent, as Americans hit by higher fuel prices started turning back to car models and away from SUVs and pickups, which GM depends on for its sales and profit.

In the face of reduced demand, the company took large charges to buyout more than 30,000 union-represented workers, as it closed some factories and prepared to shut others. It also struggled to deal with rising health care costs for both active employees and its larger pool of retirees and both groups' family members. The company spent $1.9 billion on retiree health cost in the first half of the year, a cost not faced by its overseas competitors.

GM and U.S. rivals Ford Motor (Charts, Fortune 500) and Chrysler Group are just beginning negotiations with the United Auto Workers union on a new labor deal to replace the ones that expire Sept. 14. The three U.S. automakers are seeking further cost savings from the union, with health care a key area of discussion.

GM officials referred to performance in the North American operations as near-break even and Chairman and CEO Rick Wagoner said that the narrow profit in North American auto operations did not negate the need for further cost-cutting efforts there.

"It's true that our North America team has made huge improvements, and we appreciate everyone's hard work. But our current earnings clearly demonstrate we've got more to do," he said in the company's statement.

"Going forward, we need to generate adequate profitability and cash flow to fund new product and key technology investments, like bio-fuel and hybrid-powered vehicles, to better position our business for sustainable growth," Wagoner added.

Chief Financial Officer Fritz Henderson told analysts and investors that, "concerns remain regarding housing market weakness and volatile fuel prices in the U.S. The challenge we have in North America and the U.S. remains foremost in our minds."

The company also again declined to give a forecast when its North American operations would post a full-year profit. The third quarter is typically the most difficult in terms of profits for automakers as they shift production to the new model year.

But even with those clouds and cautions, shares of Dow component GM (Charts, Fortune 500) were up 96 cents, or about 3 percent, in midday trading to $33.57.

The company overall earned $1.4 billion, or $2.48 a share, excluding special items, compared with $1.2 billion, or $2.03, on that basis a year earlier.

Analysts surveyed by Briefing.com had forecast that GM's earnings would fall to $1.13 excluding special items in the most recent period, due to the sale of 51 percent of its money-making finance unit, GMAC, during the last year.

Special charges in the period, including GM's support of the bankruptcy and reorganization of its former parts unit Delphi, along with restructuring of its own North American operations, came to $520 million, or 92 cents.

Including those charges, the company had net income of $891 million, or $1.56 per diluted share, which was a big improvement from the net loss of $3.4 billion, or $5.98 a share, a year earlier.

David Healy, an analyst with Burnham Securities who had a more bullish forecast of $1.55 a share for the second quarter, said that he was more impressed with the overseas results than the narrow profit in North America. He was actually a bit disappointed that GM couldn't do better in its home market.

"Across the board [overseas] their numbers were damn good," said Healy. "I think everyone will be raising their estimates for the year. Their cost-cutting pulled through, the mix was better and pricing was better."

GM's overseas auto operations also reported improved results, giving it global automotive earnings of $764 million excluding items, up from $367 million it earned on that basis a year earlier. Operations in each of its three overseas regions - Europe, Asia Pacific and Latin America, Africa and the Middle East - all posted improved profits.

"Our heavy commitment to key growth markets around the world really paid off in strong growth and earnings," Wagoner said in the company's earnings statement.

GM has seen overseas auto sales grow this year and its share climbed even as U.S. sales have fallen 6.8 percent in the first half of the year.

The strong overseas sales helped lift automotive revenue to $45.9 billion from $44.8 billion a year earlier, even as revenue from North American auto sales fell by $1.3 billion, due to a 95,000 drop in the number of vehicles sold. First Call's forecast was for global auto revenue of only $44.5 billion in the period.

Total revenue came to $46.8 billion, down from $53.9 billion in the year-earlier period, which still included revenue from GMAC.

But Healy said the future performance of the stock this year will ride much more on how investors see the state of labor negotiations than on its sales and earnings results.

"The market has been ignoring GM sales results for the past couple of months," he said.

Even with the gains in overseas auto sales, GM now trails Japanese rival Toyota Motor (Charts) in global sales, since Toyota has seen even stronger global growth. And other Asian automakers, such as Honda Motor, (Charts) continue to take share in the U.S. from the traditional Big Three brands.

Chrysler Group is in the process of being sold by German automaker DaimlerChrysler (Charts), in a deal expected to close this month.