Net Earnings Gain but Profit Margin Falls : GM’s Operating Income Retreats 4.3%

DETROIT —  General Motors reported Thursday that its operating earnings in the first quarter fell 4.3% as gains from its Draconian cost reductions and plant closures were wiped out by a drop in car sales.

The big auto maker said its operating profit fell to $657.6 million in the first quarter from the 1987 period.

Net earnings, which were significantly affected by complex accounting changes due to modifications in the tax laws, rose during the quarter ended March 31 to $1.09 billion from $922.5 million a year ago. Revenue increased to $26.44 billion from $26.1 billion.

But the company’s profit margin on revenue fell to 13.4% in the quarter, down 1.7 percentage points from 15.1% during the first period of 1987.

GM’s worldwide vehicle sales were down 5.2% from the year-ago quarter. U.S. sales of American-made cars and trucks to dealers fell nearly 16% against the first three months of 1987 as dealers balanced their inventories; U.S. sales account for about 61% of GM’s worldwide vehicle sales.

GM said it reduced its fixed costs by $1.3 billion during the quarter, as it continued a massive program designed to eliminate expenses of $4 billion by the end of the year. But analysts noted that rising variable costs, including higher raw material prices and increased labor rates, combined with lower sales volume to wipe out the cost-cutting efforts.

“These encouraging results (on fixed costs) did not fully offset lower factory sales, lower earnings at GMAC (GM’s finance unit) and unrecovered economic cost increases,” GM Chairman Roger B. Smith and President Robert Stempel acknowledged in a prepared statement.

GM officials are scheduled to meet with industry analysts today, and some on Wall Street expect GM to announce even more ambitious cost-cutting targets to improve its bottom line for the rest of the year.

“I doubt they will be facing higher sales volume for the year, so they will have to be working twice as hard on fixed cost reduction to offset rising variable costs for labor, steel and plastic,” said Maryanne Keller, automotive analyst with Furman, Selz, Mager, Dietz & Birney in New York.

More on earnings, Pages 4, 5