Massive one-time charges haunt GM’s Q2

North America loss is $4.4 billion, total net loss is $15.5 billion

Craig Trudell and
and Philip Nussel

Automotive News | August 1, 2008 - 7:11 am EST

DETROIT — General Motors today reported an adjusted loss of $6.3 billion — before several one-time charges — during the second quarter. The automaker posted an adjusted gain of $1.3 billion during the same quarter last year.

Including the charges, GM said it posted a net loss of $15.5 billion during the quarter as it took increased charges for its North American restructuring and for its former finance arm, GMAC Financial Services. GM reported net income of $891 million in the second quarter of 2007.

GM posted total revenue of $38.2 billion, down from $46.7 billion during the same quarter last year.

In North America, GM said it lost an adjusted $4.4 billion before taxes and special charges on revenue of $19.8 billion. During the same quarter last year, GM said it posted a comparable gain of $92 million on revenue of $29.7 billion.

The North American loss wiped out a gain of $400 million GM posted for its other operations around the world, giving GM an adjusted loss of $4.0 billion on automotive operations compared with a gain of $1 billion during the same quarter last year.

The biggest one-time charge was $3.3 billion for employee buyouts in North America. GM posted another $1.1 billion charge for North American restructuring and capacity reduction costs.

GM also took at $1.3 billion charge for its 49 percent stake in troubled financier GMAC, which took major writedowns in the quarter due to plummeting residual values of pickups and SUVs. GMAC said on Thursday it lost a total of $2.5 billion during the quarter, including $716 million in writeoffs for auto leasing.

GM also said it lost $2.8 billion in the quarter because of ongoing bankruptcy restructuring at supplier Delphi Corp. It also incurred a $197 million charge for the three-month UAW strike at American Axle & Manufacturing Holdings Inc.

PRESS RELEASE: GM Reports Preliminary Second Quarter Financial Results

FOR RELEASE: 2008-08-01

* Adjusted net loss of $6.3 billion, reported net loss of $15.5 billion

* Results impacted by $9.1 billion of predominantly non-cash special items

* Sales records set in three of four regions

* Q2 liquidity position of $21 billion, plus credit lines of additional $5 billion

DETROIT – General Motors (NYSE: GM) today announced its financial results for the second quarter of 2008, which include significant charges and special items. The reported net loss was $15.5 billion or $27.33 per share for the second quarter, including these charges and special items, compared with net income from continuing operations of $784 million or $1.37 per share in the second quarter of 2007. On an adjusted basis, GM posted a net loss of $6.3 billion or $11.21 per share, compared with net income from continuing operations of $1.3 billion or $2.29 per share in the same period last year.

GM previously announced that it anticipated a significant second quarter loss, driven in large part by costs associated with the American Axle and local U.S. strikes, and charges related to the successful U.S. hourly attrition program, actions to reduce North American truck capacity, Delphi and other matters. The operating and liquidity actions announced on July 15 contemplated weak second quarter results and a continued unfavorable U.S. environment. The company has outlined a strong cadence of product, powertrain, capacity and liquidity actions over the past 60 days, to realign the business with current U.S. economic and auto market conditions, and position the company for profitable global growth.

Some of those actions include cessation of production at four truck plants, shift reductions at two truck plants, the addition of shifts at two car plants, announcement of the new Chevrolet global small car program and next generation Chevrolet Aveo compact car, introduction of a high-efficiency 4-cylinder engine for U.S. application, salaried headcount reductions and compensation actions, deferral of certain payments to the UAW VEBA, suspension of the dividend on common stock, reductions in sales and marketing budgets, the strategic review of the Hummer brand and production funding approval for the Chevrolet Volt extended range electric vehicle.

“As our recent product, capacity and liquidity actions clearly demonstrate, we are reacting rapidly to the challenges facing the U.S. economy and auto market, and we continue to take the aggressive steps necessary to transform our U.S. operations,” said GM Chairman and CEO Rick Wagoner. “We have the right plan for GM, driven by great products, building strong brands, fuel-economy technology leadership and taking full advantage of global growth opportunities.”

GM’s second quarter results were primarily driven by several factors: significant losses in GM North America (GMNA) due to continuing U.S. industry volume declines and shifts in vehicle mix, the long strike at American Axle and large lease-related charges; a number of special charges associated with GM’s ongoing restructuring actions; continued losses at GMAC Financial Services (GMAC) and updated estimates regarding recoveries and expectations of assumed benefit obligations in the Delphi bankruptcy.

GM recorded $9.1 billion of special items, predominantly non-cash in nature for the current quarter or near-term periods, which include:

* $3.3 billion relating to the 2008 GMNA hourly special attrition program

* $2.8 billion adjustment to the Delphi reserve

* $1.1 billion GMNA restructuring and capacity related costs

* $1.3 billion impairment of GM’s equity interest in GMAC

* $340 million Canadian Auto Workers contract-related accounting charges

* $197 million related to settlement of the strike at American Axle

Details on these and all other special items are in the financial highlights section of this release.

In addition, the GMNA adjusted net income results reflect a $1.6 billion charge related to lower residual values for off-lease vehicles. The total impact of declining residual values in GM’s second quarter earnings was $2.0 billion, including impairments of lease assets at both GMAC and GM.

Revenue for the second quarter was $38.2 billion, down from $46.7 billion in the year-ago quarter, which is more than accounted for by the decline in GMNA revenues. Combined revenues for the GM Europe (GME), GM Asia Pacific (GMAP) and GM Latin America, Africa and Middle East (GMLAAM) regions were $20.8 billion, up $1.7 billion over the same period 2007.

GM reports its automotive operations and regional results on an earnings-before-tax basis, with taxes reported on a total corporate basis.

GM Automotive Operations

The second quarter adjusted automotive loss of $4.0 billion ($9.1 billion reported) reflects the losses in GMNA driven largely by volume declines including the impact of the American Axle and local strikes as well as adjustments to lease vehicle residual reserves. In addition, GMAP results were negatively impacted by adjustments relating to hedge accounting. The losses were partially offset by exceptionally strong performance in the GMLAAM region and continued profitability in GME. The loss compares with adjusted automotive earnings from continuing operations of $1 billion in the second quarter of 2007 (reported earnings of $803 million).

GM sold 2.29 million vehicles worldwide in the second quarter, down 5 percent year over year. Sales in GMNA were down 20 percent, or 236,000 units versus the year-ago period, while sales outside of North America grew by 10 percent or 116,000 units. A record 65 percent of GM unit sales for the second quarter were outside the United States. Global market share was 12.3 percent, down 0.9 percent due to weakness in North America.

GMNA revenue for the second quarter was $19.8 billion, down from $29.7 billion in the year-ago period. The decline was largely attributable to a markedly weaker U.S. auto market and lost production due to the work stoppage at American Axle, and at several GM facilities in May and June. Although volume overall was down 20 percent, some of GM’s most recently launched cars and crossovers continue to sell especially well, including the Chevrolet Malibu and Cadillac CTS, up 113 percent and 33 percent, respectively, over the year-ago period.

GMNA adjusted results reflect significantly lower volume resulting from overall industry deterioration, continued dealer stock reductions, the negative impact of industry segment shifts, model/option mix and an increase to lease vehicle residual reserves related to declining residual values. The results also reflect favorable structural and net material cost performance and pension/OPEB/manufacturing savings.

GME

GME achieved record second-quarter sales of 590,000 units, driven by 48 percent sales growth in Russia and exceptional performance of the Chevrolet brand, which saw a 19 percent increase in sales to 137,000 units and record market share of 2.2 percent in the second quarter. Material and structural cost performance improved during the quarter. However, unfavorable exchange rates and an economic slowdown in key markets including Spain, Italy and the U.K. had a significant impact on earnings.

GMLAAM

Improved mix, net pricing and material cost performance along with strong sales performance in key markets helped GMLAAM to improve its year-over-year earnings before tax by over 50 percent, to $445 million. Volume for the region was up nearly 18 percent over 2007, and quarterly sales records were set in Brazil, Chile, Egypt and North Africa.

GMAP

The second quarter earnings for GMAP reflect a $285 million pretax accounting charge related to adjusting prior FAS133 hedge accounting, partially offset by gains in India and Thailand, and improved operating performance at Australia’s Holden.

GMAC

On a standalone basis, GMAC reported a net loss of $2.5 billion for the second quarter 2008. Affecting results were continuing large losses at Residential Capital, LLC (ResCap) related to asset sales, valuation adjustments and loan loss provisions, as well as a $716 million pre-tax impairment of lease assets in the automotive finance business as a result of lower used vehicle prices, particularly for SUVs. These items were partially offset by profitable results in the insurance and international auto finance businesses. GM reported an adjusted loss of $1.2 billion for the quarter attributable to GMAC, as a result of its 49 percent equity interest.

Following a first quarter impairment against its investment in GMAC, GM conducted further analysis in the second quarter to determine if additional impairments were required based on current fair value estimates. Factors considered include continued deterioration in the mortgage and consumer credit markets and a more challenging North American automotive financing environment. As a result, GM recorded impairment charges totaling $1.3 billion against its common and preferred equity interests in GMAC.

Cash and Liquidity

Reflecting the non-cash nature of many of the charges recorded in GM’s reported second-quarter results, cash, marketable securities, and readily-available assets of the Voluntary Employees’ Beneficiary Association (VEBA) trust totaled $21.0 billion on June 30, 2008, down from $23.9 billion on March 31, 2008. The change in liquidity reflects negative adjusted operating cash flow of $3.6 billion in the second quarter 2008, driven primarily by weaker results in GMNA. As of June 30, including undrawn, committed U.S. credit facilities of approximately $5 billion, GM has access to approximately $26 billion in liquidity. In July, GM provided notice to draw $1 billion under its secured revolving loan facility.

As announced on July 15, GM is taking operating and related actions to improve cash flow by approximately $10 billion through the end of 2009. In addition, the company has outlined plans to raise approximately $5 billion through capital markets activities and asset sales (See related news release). GM is confident that these initiatives, along with its current cash position and $4-5 billion of committed U.S. credit lines, will provide the company with ample liquidity to meet its operational needs through 2009.

Results for the second quarter of 2008 are preliminary and may be revised prior to the filing of GM’s quarterly Form 10-Q in August.