GM's bad news expected to get worse

DETROIT -- It's hard to ignore the second largest quarterly loss in U.S. history.

But General Motors Corp.'s record $39 billion loss on a charge involving unused tax credits was only one piece of dire news for the world's largest car company.

GM is hemorrhaging money, particularly in North America, and the outlook for 2008 and beyond is bleak. A soft U.S. market, high gas prices, the housing slump and jittery consumers will hamper the automaker's restructuring efforts, industry analysts said. GM reported the latest loss Wednesday.

"We continue to expect the fundamentals to worsen before they improve," Bear Stearns analyst Peter Nesvold said in a note to analysts.

GM's third-quarter loss of $39 billion was the second-worst quarterly net loss in U.S. corporate history under generally accepted accounting principles, said Howard Silverblatt, senior index analyst for Standard & Poor's. The loss was exceeded only by AOL Time Warner's $44.9 billion, or $10.04 per share loss, in the fourth quarter of 2002, he said.

GM attributed most of the third-quarter loss to a $38.6 billion noncash charge related to accumulated deferred tax credits in the U.S., Canada and Germany. Accounting rules require companies to write down the value of such credits if they have scant prospects for a return to profitability in the near term.

Reaction was swift. GM shares fell nearly 5 percent, or $1.67, to $34.48. S&P cut GM's 12-month target price by $7 to $32, while Moody's Investors Service downgraded its outlook on GM from positive to stable.

The pain was all the more acute with Toyota Motor Corp.'s announcement Wednesday that its profit for the fiscal second quarter rose 11 percent to a company record $4 billion. Toyota and GM are vying for the title of world's largest automaker by sales this year.

GM reported an overall loss of $1.6 billion, or $2.80 per share, excluding special items. In addition to the accounting change, special items included a $3.5 billion after-tax gain on the $5.4 billion sale of Allison Transmission in August.

GM Chairman and Chief Executive Rick Wagoner told WWJ-AM in Detroit the accounting shift won't have a substantial impact on the business.

"I would stress no impact whatsoever on our cash position, no impact on our ability to use the tax offsets in the future, and from my perspective, really no change whatsoever in our outlook or optimism about the future of getting the business turned around," he said.

What's more troubling for GM is continuing losses in North America, where it reported a net loss of $247 million without the charge for the latest quarter. That compares with a net loss of $667 million in the year-ago period.

GM's chief financial officer, Fritz Henderson, said the company is bullish about its products and the money it will save from a new four-year contract with the United Auto Workers, which was approved by workers last month. An agreement to put GM's retiree health care liability into a union-run trust won't affect GM's books until 2010, but the automaker will see some benefits from the contract starting next year, he said.

"We feel good about our long-term prospects," he said.

But Henderson wouldn't predict when GM will return to profitability. He said the company faced numerous headwinds it didn't predict at the beginning of 2007, including the strength of the Canadian dollar, rapid escalation in the price of steel and other metals and a weaker than expected U.S. market.

GM also reported a loss of $757 million from its 49 percent stake in GMAC Financial Services, due largely to losses at ResCap, GMAC's mortgage arm.

Henderson said GMAC has been hit by volatility in the mortgage market. ResCap has tightened its underwriting criteria and has moved away from the business responsible for those losses, he said, but the outlook for the unit is uncertain.

There were some bright spots. GM's sales and profits overseas were strong -- volume was up 22 percent in Latin America and 16 percent in Asia.

Kevin Tynan, a senior automotive analyst with Argus Research Corp., said GM has been doing a lot of things right, including lowering costly incentives, backing off low-margin fleet sales and reaching the cost-saving agreement with the UAW. GM has cut $8 billion in annual costs and shed more than 34,000 hourly workers since its restructuring began in 2005. But if the U.S. market stabilizes at 15 million to 16 million vehicles a year, he said, GM will have to make further cuts to be profitable.