General Motors Corp on Wednesday posted a larger-than-expected operating profit as its restructuring took hold and raised its cost-cutting target by $1 billion, sending its shares to a 10-month high.
GM, the world's No 1 automaker by sales volume, reported a wider net loss for the second quarter after writing down $4.3 billion in previously announced costs associated with buyouts for almost a third of its factory work force.
But excluding those restructuring charges, GM outperformed the most optimistic Wall Street projections, touching off a rally in its stock and bonds that pulled shares of Ford Motor Co higher as well.
Meanwhile, the cost of insuring GM's debt against the risk of default fell sharply on the signs that GM's turnaround effort was producing results. GM raised its target for cutting recurring costs in North America by $1 billion to $6 billion by the end of 2006. Chief Executive Rick Wagoner, who has been under pressure to show improvement as GM studies a possible three-way proposal with Nissan Motor Co Ltd and Renault SA, said the results vindicated the company's strategy.
"Our turnaround has not just gained traction, it's accelerating into high gear," Wagoner said. "While significant work still remains, our ability to identify and initiate $9 billion in cost cuts over the past year is unprecedented in this industry." Combined with GM's first-quarter net profit, the results show the automaker is on the right track, although sustained gains will hinge on GM's success in moving beyond cost-cutting, Argus Research analyst Kevin Tynan said.
GM Chief Financial Officer Fritz Henderson said results for the final two quarters of the year would show continued improvement against 2005 results.
But he said GM management would not back away from a commitment to spend three months studying the possible benefits of an alliance with Nissan-Renault, and the chief executive of those companies, turnaround specialist Carlos Ghosn.
"We'll spend 90 days and do a good job assessing (the alliance)," he said. "The second quarter results don't affect that." GM posted its first operating profit in global auto operations since 2004 after cost reductions in the US market. The loss in North American operations - the focus of GM's restructuring - narrowed to $85 million in the quarter, excluding charges, an improvement of $1.1 billion from the year-earlier period on lower pension and other costs.
The improvement came despite weaker US vehicle sales in the quarter. GM's unit sales were off 17 percent in the quarter, but the automaker steered clear of the big discounts that boosted volume while cutting into margins a year earlier.
GM's introduction of a new line of full-size SUVs such as the GMC Yukon and Cadillac Escalade drove average sale prices per vehicle higher, Henderson said.
High gas prices and rising interest rates have hurt sales of SUVs and pickup trucks, but the new line of GMT-900 SUVs have taken share from rivals in the weaker market.
Total revenue rose to a record $54.4 billion from $48.5 billion. Auto revenue rose 11 percent to $45.2 billion. On a net basis, GM posted a second-quarter loss of $3.2 billion, or $5.62 per share, compared with a loss of $987 million, or $1.75 per share, for the year-ago quarter.
But excluding charges related to buyouts for over 34,000 of its unionised workers, GM posted a profit of $2.03 per share. For the second quarter, GM had operating cash flow of $700 million, a more than $2 billion improvement from the year earlier. That included a $1.4 billion dividend from GM's financial arm, GMAC. GM has agreed to sell a controlling stake in GMAC in a deal expected to close in the fourth quarter.