GM to take $39-billion charge against earnings
General Motors Corp., the world’s largest carmaker, startled Wall Street on Tuesday by announcing a $39-billion charge against earnings that sets the stage for a record-breaking quarterly loss.
The announcement came just hours before Detroit-based GM was to release its third-quarter earnings, and analysts said the explanation of the massive charge indicated that the automaker had a stunning lack of confidence in its future profitability.
In a statement, GM stressed that the charge was an accounting adjustment and not related to current operations.
However, the effect on the company’s earnings, which are scheduled to be released today, is very real and probably will lead to a giant red number at the bottom of the balance sheet.
Prior to the announcement, the preponderance of analyst estimates called for a loss of about $100 million, but the new charge will dwarf that.
GM posted a profit of $62 million in the first quarter of this year and earnings of $891 million in the second quarter.
GM’s worst recent earnings came in 2005, when it recorded a loss of $4.8 billion in the fourth quarter and $8.6 billion for the year.
That same quarter, Ford Motor Co. lost $5.8 billion, and $12.7 billion on the year -- considered at the time a titanic loss.
The $39-billion charge stands in stark contrast to GM’s upbeat stance after the resolution of contract negotiations with the United Auto Workers union in September, which will allow it to take huge healthcare and pension liabilities off its books.
GM made the announcement after the close of regular trading, when its shares rose 16 cents to $36.16. They fell $1.02 to $35.14 in the after-hours market.
GM Vice Chairman and Chief Financial Officer Fritz Henderson said the accounting charge would not affect the company’s cash flow. He added that the move “does not reflect a change in the company’s view of its long-term automotive financial outlook.”
The charge stems from GM’s use of an accounting tool to write off losses by taking future tax credits -- known as “net deferred tax assets.” Now, based on an internal accounting review, GM will remove those credits from the company’s books.
The change is essentially an acknowledgment by GM that it no longer anticipates future profits large enough to offset those tax credits.
“They seem to have decided to take it all at once rather than a string of smaller write-offs over consecutive quarters,” said David Healy, auto industry analyst at Burnham Securities, who called the charge “a vote of nonconfidence.”
Explaining its decision, GM noted it had faced three cumulative years of third-quarter losses in the U.S., Canadian and German markets, as well as what it called “more challenging near-term automotive market conditions.” Significantly, it also said it had encountered mortgage-related problems at GMAC Financial Services, in which GM holds a substantial interest.
The news comes at a bad time for the auto industry. Overall sales in North America are expected to decline this year and, with oil at record high prices, prospects for sales in the near future look grim.
Analysts were troubled by the mortgage exposure. GM sold off a majority of GMAC to Cerberus Capital Management last year but retained a 49% stake. GMAC said last week that it lost $1.6 billion in the third quarter, largely from its mortgage unit.
Some on Wall Street said the effect of the $39-billion charge on shareholder value should be short term because it was a tax issue rather than one related to operations.
“It’s a huge charge, but people will take a look and then a second look and then they’ll be less worried,” said Shelly Lombard, senior high-yield analyst at Gimme Credit. “The real challenge is the difficult part: trying to sell cars.”
