DETROIT -(Dow Jones)- General Motors Corp. (GM) recorded a stunning $15.5
billion second-quarter net loss, slammed by sinking auto sales, money lost on
bad lease deals and costs tied to its North American restructuring.
The auto maker's revenue sank $8.5 billion from a year ago to $38.2 billion,
as GM's sales slide in the U.S. continued and growth slowed in other regions
around the globe.
"The second quarter this year has been one of the fastest changing markets I
have ever seen," GM Chief Financial Officer Ray Young told reporters. "We're
going to get this quarter behind us and move ahead."
The results suggest that the deterioration of GM's core North American
operations is accelerating. GM's market share in the region fell more than two
percentage points from a year earlier to 20%, and demand for its most profitable
products - trucks and sport-utility vehicles - essentially collapsed as
consumers responded to high gasoline prices, weak economic conditions and
tighter credit. GM's North American revenue fell 33% to $19.8 billion.
Young said GM's results were largely driven by non-cash "special
considerations." He said he's more focused on cash and liquidity and said the
plan related to these components is "on track."
The $15.5 billion loss, equivalent to $27.33 a share, included $9.1 billion in
charges and write-downs. A year earlier, GM posted net income of $891 million as
it relied on continued strength in international operations and a slim profit in
North America to dramatically improve its bottom line.
GM shares were down nearly 9% at $10.10 in recent pre-market trading as the
latest results, excluding charges, came in well short of Wall Street
expectations. GM's adjusted loss was $6.3 billion, or $11.21 a share. Analysts
surveyed by Thomson Reuters were expecting a loss of $2.62 a share on revenue of
Profitability Elusive Despite Restructuring
GM has posted a string of disappointing results going back to 2005. Since
then, GM Chief Executive Rick Wagoner has been racing to cut costs, slim down
operations and remake the vehicle portfolio in North America, where GM posted a
$9.3 billion loss in the latest quarter.
Meantime, Wagoner has invested heavily in emerging markets, placing big bets
in Latin America, Eastern Europe and Asia even as market share dwindles at home.
In the second quarter, a record 65% of GM's vehicle sales were generated outside
the U.S., which is enduring its worst period for sales in about 15 years.
The weakness in the U.S. market has led GM to take extensive and costly
actions. In 2008, the company has laid out plans to close four truck and SUV
plants, buy out 19,000 workers and scale back on vehicle leasing due to
dwindling resale values on vehicles such as the Chevrolet Trailblazer.
Charges related to these actions, combined with consistent operating losses,
have reduced GM's cash reserves. In the second quarter, it became evident the
cash drain had accelerated to the point where it would need to raise an
additional $15 billion by the end of 2009 to stay afloat. GM said last month it
will accomplish this through cost cuts, asset sales and seeking loans backed by
GM said Friday it posted a negative operating cash flow of $3.6 billion in the
second quarter. The company finished the period with $21 billion in cash,
marketable securities and readily available assets of the VEBA employee trust
fund, down from $23.9 billion at the end of the second quarter.
On Thursday, Standard & Poor's downgraded its credit ratings on GM, Ford Motor
Co. (F) and Chrysler LLC further into junk status, citing mounting losses in
their North American operations and the deteriorating conditions in the U.S.
auto market. S&P said that it could further downgrade GM if its cash position
dropped below $15 billion.
The difficulties at top supplier Delphi Corp. (DPHIQ), which is locked in
bankruptcy protection, and GMAC LLC, of which GM sold majority stake to Cerberus
Capital Management, are compounding the financial woes. Delphi's difficulties
have cost GM billions in recent years, and its inability to emerge from
bankruptcy could spoil GM's chances of reaping a financial recovery. At GMAC,
weak auto- and home-lending operations are forcing GM to write down further the
value of its investment, while at the same time booking red ink due to the
lending arm's bleeding.
In the second quarter, GM's charges included $2.8 billion in reserves
associated with the benefit guarantees and settlements related to Delphi's
restructuring. GM also took a $1.3 billion impairment of its equity interest in
International Operations Losing Steam
Another source of source of concern in GM's numbers is the deterioration in
the performance of its key international units, which GM has relied on in recent
quarters to offset the weakness in North America.
GM's Asia-Pacific business swung to a pre-tax loss of $163 million from a
profit of $280 million, while GM Europe's bottom line fell by nearly $300
million to $20 million. GM's Latin America, Africa, Middle-East business was a
bright spot, with profit rising to $445 million from $296 million.
The weakness in North America, however, continues to be the company's
Analysts have criticized GM for having too many brands and an unfavorable
product portfolio that can't effectively compete with Asian rivals. The biggest
problem GM has in the region is a so-called mix shift in which sales of
profitable trucks and SUVs are either evaporating altogether, or being replaced
by the sale of low-margin passenger cars, such as the Chevrolet Cobalt. GM has
made steps to make its cars more profitable, but the transition is slow.
Weakness in the truck and SUV category is sinking the case for auto leasing.
As the used car market is flooded with these vehicles, the resale value
plummets. Vehicle leases - composing about 40% of the GM's volume financed by
GMAC - are economically sensible for an auto maker to fund only if resale values
are attractive and stable.
GM, like its Detroit rivals, has in recent days announced steps to scale back
leasing. That removes a valuable financing option for already strapped
consumers, and could further dent sales of U.S auto makers.
GM said that the total impact of declining residual values in the second
quarter results was $2 billion, including impairments of leases assets at both
GMAC and GM.
-By John D. Stoll, The Wall Street Journal, (248) 204-5533; firstname.lastname@example.org
-By Sharon Terlep, Dow Jones Newswires; (248) 204-5532; sharon.terlep@
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