General Motors Reports $1.1 Billion First-Quarter Loss

On the heels of a conference call yesterday during which General Motors reported a $1.1 billion loss and withdrew its earnings guidance for the year, Wall Street analysts said the company made matters worse by offering no clear vision as to how it plans to turn itself around.At the core of GM’s woes are its struggling North American operations, which its chief financial officer, John Devine, said lost $1.57 billion in the first quarter compared to a profit of $561 million in the same period last year. There was no relief coming from Asia, South America, or Europe on the sales front, which added another $630 million in losses. Altogether, losses from GM’s vehicle manufacturing and sales worldwide totaled $2.2 billion.Mr. Devine declined to discuss GM’s biggest sore spot, its $5.6 billion in employee health costs this year. In interviews on the subject over the previous two weeks, however, GM CEO Richard Wagoner repeatedly spoke of a “health-care cost crisis.” The company said last month that health care costs add $1,500 per vehicle.On the call, Mr. Devine said GM continues to seek areas to cut costs, and he said that the company spent $148 million to lay off 2,800 white-collar workers, about 5% of the salaried workforce. On the production side, GM said it will continue to drastically cut its production – it made 100,000 fewer vehicles in the first quarter compared to the first quarter of last year – in the hopes of reducing inventory before new models are introduced over the summer. Also, a decline in the supply of available vehicles would allow the company to stop offering discounts.Even General Motors Acceptance Corporation, the company’s highly profitable financing unit and one of the largest guarantors of vehicle loans and commercial real estate in the world, declined in profitability, to $728 million from $764 million, as higher interest rates made lending money to car buyers less profitable.In an interview with Bloomberg News, Mr. Devine said the company would not cut its $2 per share stock dividend. At yesterday’s closing price of $26.09, the common stock now yields 7.6%, almost a half percentage point more than junk bonds.There was no easy way for GM’s management to spin a conference call in which they had to discuss losing $1.1 billion when the company had forecast earning money until March 16, said Maryann Keller & Associates’ president, Maryann Keller. “But what management didn’t say was really troubling,” she said. Ms. Keller, a former Institutional Investor All-America Research Team pick when she worked at Furman, Selz & Company in the 1990s, was looking for an explanation for why employee health care costs have suddenly become an issue that GM claims is threatening the health of the company.“In 2003 GM signed an agreement with the UAW that locked them into this agreement. They used detailed projections about their businesses to get comfortable with it,” she said. “What’s changed is that the company’s revenue forecast has completely collapsed. My question is: Why?”Ms. Keller suggested that while health care costs are a big problem, what GM is failing to disclose is that the gas crisis, coupled with its failure to achieve leadership in any area of the auto market – outside of GMC pickups – have relegated the company to also-ran status. In turn, GM has little pricing power for larger-margin vehicles like minivans and sport utility vehicles, and has to compete by selling more at a lower price.“The problem with that,” said Ms. Keller, “is that it costs $50 or more a week now to drive one of those cars, which forces a lot of buyers away.” She said buyers have gravitated to industry leaders, such as the Lexis 400 SUV and the Chrysler Town and Country minivan, and are ignoring the third- and fourth-place GM offerings.“What’s worse is that the gas crisis caught them flat, with no real high mileage per gallon offerings, unlike the Japanese or even Ford.”What concerns Wall Street the most, however, is GM’s cash flow.For the quarter, the company reported negative operating cash flow of $4.7 billion. CreditSights President Glenn Reynolds called the figure “alarming,” adding that GM’s cash flow may provoke a ratings agency into a credit-rating downgrade if it doesn’t improve within the next quarter. A downgrade in the creditworthiness of GM’s debt, which is already at the lowest rung of investment-grade at the three largest credit-rating agencies, would cost the company an additional $2.4 million in interest per $100 million it issues. Moreover, a cut to junk status by two out of the three agencies would force GM out of the widely benchmarked Lehman Brothers index, forcing funds that are permitted to buy only investment grade bonds to sell their GM debt.GM had issued or guaranteed $301 billion in debt by the end of last year.CreditSights’ Mr. Reynolds said the call was disappointing because GM did not address how much a change in interest rates would affect the dozens of individual businesses that make up GMAC. He said GMAC will likely be forced to sell billions of dollars worth of loans to Wall Street.

General Motors Reports $1.1 Billion First-Quarter Loss

General Motors Reports $1.1 Billion First-Quarter Loss

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