Loss Deeper Than Estimates

By Reuters -  |  Posted 2008-08-01

DETROIT (Reuters) - General Motors Corp posted a $15.5 billion quarterly loss on Friday, as North American sales dropped by 20 percent and plunging prices for SUVs prompted deep charges for its auto finance business.

GM shares tumbled 6 percent in reaction to the automaker's announcement of the deeper-than-expected loss, the third-largest quarterly loss in its history.

The No. 1 U.S. automaker also burned through $3.6 billion in cash in the quarter as it reduced inventory of slower-selling vehicles in its slumping home market.

GM ended the second quarter with $21 billion in cash and $5 billion in credit facilities. It said it had provided notice in July that it would draw down $1 billion under a secured revolving loan facility.

The struggling automaker's cash position has become an increasing concern for investors and analysts, who have begun to question whether and when GM's liquidity could fall below the levels needed to run its cash-hungry global operations.

Chief Financial Officer Ray Young said GM's second-quarter cash position was slightly better than the automaker had forecast and said GM was on track with a plan to free up $15 billion in liquidity through 2009 with a combination of cost-cutting, asset sales and new borrowing.

Charges for a planned reduction of about 15 percent of GM's salaried work force in the United States and Canada will hit third-quarter results, Young said.

"From my perspective, we are going to get the second quarter behind us and just move ahead with our restructuring and liquidity plans that we announced over the last 60 days," Young told reporters.

Erich Merkle, an automotive consultant with accounting and consulting firm Crowe Chizek, said GM's loss underscored the need for it to shed more brands outside Chevrolet and Cadillac, a step the automaker has so far resisted.

"Do they have the resources to make all those different divisions competitive at the same time? I don't think so," Merkle said. "You have got to take a hard look at GMC, Saturn, Buick, Pontiac -- anything really outside of Chevrolet and Cadillac."


GM's net loss was equal to $27.33 per share, compared with a profit of $891 million, or $1.56 per share a year earlier, reflecting a sharp drop in demand for the light trucks that represent about 60 percent of its sales.

GM took $9.1 billion in charges against second-quarter results, including $3.3 billion for buyouts of U.S. factory workers, $2.8 billion for its exposure to bankrupt former parts unit Delphi Corp.

Revenue fell to $38.2 billion from $46.7 billion.

Excluding charges, GM posted a loss of $6.3 billion, or $11.21 per share. The loss on that basis was more than four times Wall Street expectations for a loss of $2.67 per share, as tracked by Reuters Estimates.

After losses totaling $51 billion over the previous three years, and a $3.25 billion loss in the first quarter, GM faced a battery of problems in the second quarter, including a slide in U.S. sales that sent its shares to a 54-year low.

GM's global auto sales dropped 5 percent and it lost $4 billion on its auto operations before charges in the second quarter as record gas prices sank demand for trucks and SUVs.

The automaker was also hit by some $2 billion in pretax losses from a strike by the United Auto Workers union at a key supplier and some of its own plants during the quarter.

Then the market for financing leases on big SUVs collapsed, saddling both GM and its smaller rival Ford Motor Co with large losses.

On Thursday, GMAC LLC, GM's former financing arm, was forced to write down the value of the GM's lease contracts because of the slumping value of the carmaker's big SUVs.

Under lease contracts, automakers and their finance companies rent vehicles to consumers and sell the used vehicles when the leases expire at wholesale auctions.

But the collapse in demand for SUVs this year has been accompanied by a steep drop in their resale value as consumers flock to more fuel-efficient passenger cars.

The resulting drop in resale values on SUVs prompted a $717 million charge by GMAC and bigger subsidies by GM, which retains 49 percent of the finance company after spinning off the remainder to Cerberus Capital Management.

GM said declining lease values at GMAC had depressed its second-quarter results by $2 billion.

Shares in GM touched a 54-year low in July and remain down over 55 percent since the start of the year. GM bonds also hit a record low on Thursday after ratings agency Standard & Poor's downgraded GM to "B-minus" and warned the automaker was on track to burn through roughly $16 billion this year.

GM has not given a timetable for returning to profitability. Many analysts now expect that a substantial recovery for U.S. auto sales will not come until 2010.

(Reporting by Kevin Krolicki; Editing by Derek Caney, Gerald E. McCormick, Dave Zimmerman)