College Times

Issue date: 2/7/08 Section: MCT News

DETROIT _ Despite a historic new labor agreement, a garage full of new products and $9 billion in cost-cutting over the last two years, General Motors Corp.'s release of its worst-ever annual financial results Tuesday shows that its North America division is still struggling to post the profits that Wall Street expects.

GM Chief Financial Officer Fritz Henderson acknowledged "there are still a number of near-term challenges," but overall he seemed positive about the progress GM has been making.

GM, which celebrates its 100th anniversary this year, on Tuesday reported the worst loss in automotive history _ $38.7 billion, compared with $2 billion in 2006.

The world's largest automaker is forecasting improved sales and pretax earnings this year, mostly because of strength in emerging markets. Non-U.S. sales now make up about 60 percent of GM's revenues.

But GM's performance in North America is causing some analysts to reevaluate where the automaker stands in its turnaround and examine how the company might really fare in the tough U.S. economy this year. Consumers haven't been much in the mood to buy new cars and trucks with a housing and credit crisis underfoot.

"Something's happening that continues to erode GM's earnings power faster than the restructurings can offset," Peter Nesvold, an auto analyst with Bear Stearns, told the Detroit Free Press.

He said that seems to put GM, and Detroit's auto industry, "stuck in restructuring mode" until it can achieve some more meaningful improvement.

Much of the retiree health care savings from the new UAW contract don't really kick in until 2010, and investors are getting impatient.

GM shares fell 52 cents, or 1.9 percent, on Tuesday to close at $26.60.

The automaker also announced on Tuesday a new, beefed-up buyout program to get an undisclosed number of workers to voluntarily take themselves off the payroll, among other actions.

Much of GM's loss _ a whopping $38.3 billion of it _ was the result of a complicated noncash accounting charge that does not exactly relate to the fundamentals of the company's operations.

Excluding those special charges, GM posted a much smaller pretax loss of $1.4 billion for the year, compared with a pretax profit of $628 million a year ago.

GM's deterioration in operating results wasn't the fault of sales.

The automaker's sales increased 3 percent, or 277,000 units, to 9.4 million vehicles last year, making it the second-best sales year in GM history. That, along with favorable currency exchanges, helped GM's core automotive business generate record revenue of $178 billion, a $7 billion improvement from the prior year.

Rather, GM's poor performance in pretax adjusted results fell on the shoulders of GM's North America division for the United States, Canada and Mexico. GM North America posted an adjusted pretax loss of $1.5 billion last year.

Much of that performance was explained by three factors: lower demand, big incentives on vehicles such as the Chevrolet Silverado and a tough closeout for 2007.

In the fourth quarter alone, results for GM North America deteriorated by $931 million.

"They had to start giving away pickups," explained David Healy, an automotive analyst with Burnham Securities.

That contributed to poor fourth-quarter results on the corporate level.

In the fourth quarter, GM posted adjusted net income of $46 million, or $0.08 a share. Excluding a big tax benefit, though, the automaker posted a $1.6 billion loss.

In the fourth quarter of 2006, GM posted adjusted net income of $180 million, or $0.32 a share.

The net loss for the quarter was $722 million, compared with a profit of $950 million in the fourth quarter of 2006.

Given that GM has cut $9 billion in structural costs out of its operations since 2005, Wall Street had been expecting much, much better results.

Jonathan Steinmetz, an auto analyst with Morgan Stanley, called the results "very weak ... significantly worse than expected."

What's more, several experts noted, the performance was on the back of two of GM's most important vehicle platforms _ one for its full-size pickups and SUVs, which underlie the new Chevrolet Silverado, and the other a new crossover platform, which underlies the Buick Enclave.

"The product cadence does start to slow from here," Nesvold noted, "and that will make it more difficult for them, unless demand starts to rebound."

Healy said he was shocked by GM's performance in the fourth quarter, but he still believes GM can return to profitability in 2009.

GM, he noted, has about $30 billion in cash to help it get to 2010, which is when GM gets a big _ $4 billion to $5 billion _ lift from its new four-year labor contract with the UAW.

While GM will release more details on its buyout program in the weeks ahead, most of those who accept a deal are expected to leave by July 1, the company said.

GM's new program seems to mirror one announced by Ford Motor Co. last month. Ford is hoping to get 8,000 of its hourly workers to take a deal.

GM won't say how many workers it hopes to shed. But economist Sean McAlinden of the Center for Automotive Research said last month that under its new contract with the UAW, it could replace up to 20,000 workers doing non-assembly jobs with new employees who will be paid half the old wage of $28 per hour.

GM had been offering buyouts to about 5,200 UAW workers at service and parts operations and some closed plants since December, but those workers now are eligible for the new, sweetened offer, which raises the incentive payments for retirement-eligible workers by $10,000 for production workers and $27,500 for skilled workers.

Production workers will be offered $45,000 and skilled workers will be offered $62,500 to retire with their full pension and health benefits. Those workers can take the money in a lump-sum payment or take it as monthly payments. They also can roll the money directly into a retirement account or 401(k).

GM is giving less than Ford, which is offering up to $70,000 in lump-sum payments, but GM said its offer is comparable because workers who roll the money into a retirement account won't have to pay as much in taxes.

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