Larger loss, new accounting woes at GM
Embattled auto manufacturer's shares fall after it restates '05 results to add $2B in charges, reveals accounting questions that cause it to miss SEC filing deadline, prompting Moody's to weigh new debt downgrade.
By Chris Isidore, senior writer

NEW YORK ( - The bad got worse for embattled automaker General Motors Corp., as the company's shares took another hit from a new trove of accounting problems and losses detailed by the company.

Shares of Dow component GM (down $0.65 to $21.57, Research) were off about 3 percent in midday trading Friday, after the company announced late Thursday that it is restating its already disastrous 2005 results, raising its net loss by $2 billion to $10.6 billion for the year.

While the company's operating loss was not changed in the restatement, the widening net loss was due increasing special charges related to its myriad of financial problems dogging the world's largest automaker.

It increased by $1.3 billion the after-tax charge it took in the fourth quarter to cover costs of resolving contract obligations to its former employees at bankrupt auto parts maker Delphi Corp. (Research) GM spun off Delphi in 1999.

The company has said it could be responsible for up to $12 billion to reach a settlement with Delphi and the United Auto Workers union. It now put the bottom end of that range at $5.5 billion before taxes, or $3.6 billion after taxes, up from the previous bottom end of the range of $3.6 billion before taxes, or $2.3 billion after taxes.

It also added nearly $400 million to the charge to cover the cost of the restructuring program at its core North American auto operations, as it moves to close a dozen plants and facilities and trim 30,000 hourly workers in North America. And it took a $439 million charge for the write down of goodwill at the Commercial Finance division of its GMAC finance unit.

Accounting woes on top of increased losses

The company also disclosed some details of accounting problems that GM spokesman Jerry Dubrowski said were discovered as part of a review of its practices started last fall when the Securities and Exchange Commission started a probe of its accounting practices.

One of those accounting problems, revolving around what the company said was erroneous classification of cash flows from certain mortgage loan transactions at the mortgage unit of its GMAC finance arm, will caused the company to miss a filing deadline for its 10-K full-year financial report with the Securities and Exchange Commission, a delay that could conceivably force it to be in technical default of some $32 billion in debt.

Moody's, one of the major credit rating agencies, said it was placing the company's debt on review for possible downgrade, due to that filing delay.

"Should GM be unable to meet this requirement, it could receive a notice of default," the Moody's statement said. "GM would then have 90 days to remedy the default or receive waivers, otherwise it could face an acceleration of these obligations, possibly as early as the end of June."

Moody's also said it was concerned that the accounting issues could delay a sale of the majority stake in GMAC. The company has been struggling with junk bond status for almost a year, and that has forced it to look to sell a majority stake in GMAC, so that the finance unit can regain an investment grade rating that would give it the access it needs to the capital markets.

GM's Dubrowski said the company did not think there was any risk of a default.

"We expect to file the 10-K within the next two weeks," he said Friday. "Yesterday was the deadline. We sought and received a two week extension."

Standard & Poor's, another major credit rating agency, agreed with GM that it did not see a significant risk of default due to the delay, and it did not place the company on credit watch. But it did have new criticism of the company due to the announcement.

"(The) delay in issuing its 2005 form 10-K heightens concerns about the integrity of the company's financial reporting and internal controls, but has no immediate effect on the ratings," said the firm's statement.

Finally the company also warned that investors should not continue to rely on its previously filed financial statements for the first quarter of 2005 due to accounting errors related to vehicles on operating leases with daily rental car companies.

Are deals closer for GMAC sale or Delphi-UAW?

Kevin Tynan, auto analyst with Argus Research, said that the company didn't take a bigger hit from its announcement because the problems at the automaker are so much more serious than those outlined in the report.

"Accounting issues generally tend to multiply like cockroaches, so it's not a complete surprising that there are additional issues being disclosed," he said. Tynan has had a sell recommendation on the stock since December 2004.

Tynan said he doesn't think that the accounting problems around GMAC will stop GM from being able to sell a majority stake in the unit, though.

"I would have to believe at this point that bidders who are serious players, to the extent they've already done their due diligence, this is not a surprise," he said. "What it could do is tip the balance more to the buyer, give them a little more leverage on the price."

GM's Dubrowski would not characterize the state of talks on a sale of GMAC.

Tynan said that some investors are arguing the increased charge for Delphi is good news in that it's a sign that GM is getting close to a deal in its negotiations with the union and parts supplier, but he disappears.

"I'm still taking a wait and see attitude," he said. "You hear the UAW come out and say we're not even close to a deal. There's a perception that the stock will react favorably to a GMAC deal or a Delphi-UAW deal. But I think it could sink further when people start looking at the fundamentals again after those deals are announced."

Tynan is one of the GM analysts who thinks that an eventual bankruptcy filing at GM is inevitable. Bob Schulz, the debt analyst covering GM for S&P, repeated the firm's statement of earlier in the week that it doesn't think that a bankruptcy is likely in the near term or even the most likely outcome in the longer-run. But he said even some of the possible positives that some people are looking for at GM, such as an agreement between the GM, Delphi and the UAW, have a down side.

"It's hard to say the Delphi resolution will be a positive event other than the fact that it will avoid a work stoppage," Schulz said. "We think it'll be a fairly costly resolution."

Delphi has said it will ask the bankruptcy court to void its current union deal without a contract settlement by the end of this month, a move that could spark a strike by the union.

A strike at Delphi, which is still GM's largest supplier, could halt production and perhaps even cause a bankruptcy filing at GM if it was long enough.

Executives with both companies are on record saying they expect to reach a deal with the union.

Earlier this week, union officials said there has been progress in the talks but that there is no deal yet. GM's Dubrowski somewhat echoed that position Friday.

"We continue to work with them on an agreement," he said about the union and Delphi. "I think it's fair to say there's been some progress and we've been able to refine our view (of GM's costs in any agreement.) But I'm reluctant to comment on Delphi's deadline. I would only point out that as similar deadlines have come and gone, if you can demonstrate progress, that's what's important."


For what's at stake for GM in Delphi talks,click here.

For S&P's latest on the outlook at GM, click hereTop of page

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