The automaker is reeling from lender GMAC's problems, a supplier strike, and its still money-losing North American business
General Motors (GM) just can't seem to escape its funk.
The auto company reported a first-quarter loss of $3.25 billion on Apr. 30, a huge turn in the wrong direction from the small profit it reported in the first quarter of last year. Granted, there were extenuating circumstances: massive costs related to helping its former parts unit, Delphi (DLPIV), escape from bankruptcy; the strike at key parts-supplier American Axle; and GM's 49% stake in lender GMAC. Without those items, GM lost $350 million.
And after several years of restructuring, it seems even that isn't good enough. The bottom line is GM's North American car business has yet to return to profitability. GM lost $611 million at home. That was better than some analysts expected, which is why GM's share price had jumped 2.72, or 13%, to 23.92 as of noon on Apr. 30. But the loss is proof that the company still has very far to go.
The most worrisome number coming out of GM's earnings announcement is $3.9 billion in operating cash the company burned through, much more than the $2.8 billion that Morgan Stanley (MS) analyst Jonathan Steinmetz had predicted. That prompted the analyst to write in a research note, "With liquidity a growing concern, we continue to wonder why GM pays a dividend."
U.S. Operations Still Biggest Drain
GM President and Chief Operating Officer Frederick "Fritz" Henderson says GM has adequate liquidity, with $23.9 billion in cash. But that's down more than $6 billion from what GM held at the end of the third quarter, 2007. Says Henderson, "We need to drive and manage the company for cash flow."
GM's biggest financial drain continues to be its U.S. operations. Car and truck sales in the home market are declining: GM built 885,000 vehicles in the quarter, down 178,000. The resulting $611 million loss from GM's North American auto business is more than double what the company lost in the same period a year ago. And that's after GM mitigated its red ink with about $600 million in commodity price hedging, a strategy that analysts say isn't sustainable. Add ongoing costs from Delphi and GM's $276 million share of losses from GMAC, mostly on the U.S. mortgage business, and it's clear that the company's biggest problems remain right on the front doorstep of Chairman and CEO G. Richard Wagoner Jr.
GM executives are quick to blame the weak economy and slumping car market. But even so, GM lost ground in that shrinking North American market, falling to 21.7% market share from 22.5% during the first quarter of last year. The auto picture was darkened by a strike at American Axle & Manufacturing (AXL), which makes key parts for most of GM's trucks and some of its cars. GM Chief Financial Officer Ray Young said the strike hit GM earnings to the tune of $800 million.
Good News from Overseas
The silver lining, such as it is? Henderson told analysts the American Axle strike hasn't hurt GM's ability to meet customer demand for trucks. It has merely helped the company cut bloated inventory of pickups and SUVs. In other words, if American Axle's strike hadn't shut down GM's truck plants, the company would have had to cut production anyway. Planned production cuts, as opposed to those forced by the strike, may not have hit the bottom line as hard, but the business still would have been weakened.
Some of GM's cost-cutting moves have helped. Deals with the auto workers' union to reduce jobs through early attrition plans, and cut retiree costs thanks to healthy pension fund returns, gave GM a $500 million boost on the bottom line. But it wasn't nearly enough to offset declining sales.
GM's other good news comes from overseas. GM made $1 billion in its three other regions, with the unit that covers Latin America, Africa, and the Middle East bringing in more than half of that. Even the company's long-struggling European business made nearly $200 million. And Asia continues to be a bright spot.
In the long run, the labor contract signed last fall should slash labor costs and wipe out a huge chunk of GM's health-care costs. But the company has to get through its current malaise for any of that to matter much. Until Wagoner and Henderson solve, once and for all, GM's inability to boost U.S. car and truck sales, GM will be under pressure.