High Expectations Sales Slump Ding Auto Suppliers

June 5, 2002
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HOLLAND — Donnelly Corp. cited slower U.S. automotive production as one of the factors behind its recent earnings warning, which comes as automakers and their suppliers report low net income.

Wall Street analysts expected the Holland-based automotive supplier to post earnings of 22 cents per share for the first quarter. Donnelly says it will not reach that target, although it will remain in positive territory.

Executives did not offer an estimate of what they expect to achieve in first quarter earnings, which are scheduled for release on Tuesday.

“We know we won’t make that (22 cents per share), but we don’t know how far down we’ll go. We’re still projecting,” Donnelly spokesperson Beverly Snyder said following the April 12 release of the earnings warning.

Contributing to the warning, in addition to the slower U.S. auto sales, was the recent acquisition of subsidiary Donnelly Electronics and the high costs incurred to launch new products, Chief Financial Office Kevin Brown said.

Donnelly’s earning warning came as automotive suppliers are keeping a sharp eye on U.S. auto sales.

While showing strength in February and March, U.S. vehicle sales remained below volumes of a year ago. The industry is presently on pace to sell 17.3 million units in 2001, according to analyst Mark Cornelius of Morgan & Co. in West Olive. That compares with 18.4 million units in 2000.

Cornelius, however, expects the industry to slow down a little further, with sales coming in for the year in the mid- to high 16 million-unit range — a volume that years ago would have been a record and pleased many.

“Historically, that’s a very good year,” Cornelius said. “I still think this year’s going to be a really healthy year.”

But good years in the past have set the standard higher for automakers, which entered 2001 with high inventories and moved quickly to cut production as the economy slowed. Auto suppliers in turn have taken their hits.

Zeeland-based Gentex Corp., for instance, saw its earnings and gross margin decline in the first quarter, partly because of slower U.S. auto production. Gentex, however, hasn’t had to trim production and even continues to hire new workers, spokeswoman Connie Hamblin said.

“We’re still growing, we’re just not growing as fast as we could,” Hamblin said.

Johnson Controls Inc., which has several facilities and more than 5,000 employees in the Holland area, saw North American revenues from its Automotive Systems Group fall 10 percent in the first quarter. JCI’s automotive operating income also declined 6.8 percent during the quarter from the same period a year ago, from $147 million to $137 million.

Two major auto suppliers, Delphi Automotive System and Visteon Corp., have announced major job cuts in recent weeks to reduce their operating costs.

One industry analyst, Brett Hoselton of McDonald Investments in Cleveland, sees more cuts ahead among auto suppliers if U.S. economic conditions deteriorate further. Hoselton, in fact, believes the auto industry may fall into a significant sales downturn as consumers curtail spending in response to rising unemployment rates and falling consumer confidence.

“It’s just a matter of when and how much, as opposed to if,” Hoselton said.

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