General Motors Cuts 1Q, Full Year Earnings Projections; Shares Fall to Lowest Level in a Year

DETROIT March 17. 2005; John Porretto writing for the AP reported that General Motors Corp. on Wednesday abandoned projections of a break-even or even slightly profitable first quarter and slashed its full-year earnings outlook by more than half, citing poor North American business and rising health care costs. Its share price tumbled to its lowest in more than a dozen years.

The world's largest automaker said it expects a first-quarter loss of about $1.50 a share, compared with a previous target of break-even or better. It expects income of $1 to $2 per share for the full year, down from its previous guidance of $4 to $5. GM is scheduled to report first-quarter results April 19.

"Clearly, we have significant challenges in North America," GM chairman and chief executive Rick Wagoner said of the company's largest market.

GM shares tumbled $4.71, or almost 14 percent, to close at $29.01 on the New York Stock Exchange, its lowest close since late 1992, according to Thomson First Call. In after-hours trading, the shares rose 9 cents to $29.10.

GM's troubles are many. Its product focus in the past year or so has been on its car lineup, which generates lower profits than trucks and sport utility vehicles. To make matters worse, even as industrywide sales of large trucks and SUVs have fallen because of concerns over high fuel prices, GM is saddled with an aging truck lineup that requires heavy incentives to attract buyers.

Demand for the Chevrolet TrailBlazer was off 30 percent for the first two months of this year, while sales of the pricey Cadillac Escalade EXT were down 18.7 percent for the same period.

GM, like No. 2 U.S. automaker Ford Motor Co., continues to battle declining U.S. market share amid intense competition from Asian rivals such as Toyota Motor Corp. and Nissan Motor Co. Analysts say GM may be able to lift sales with an improved vehicle portfolio, but stemming market share losses will be difficult if not impossible.

GM said it expects negative operating cash flow of $2 billion for 2005, excluding charges for ending its partnership with Italy's Fiat SpA and its European restructuring. It earlier predicted positive cash flow of $2 billion.

Also, in filings Wednesday with the U.S. Securities and Exchange Commission, GM said it was adjusting its 2004 financial statements to restate or revise previously reported results. GM said the decision was made after it determined that certain items from its finance arm recorded in the fourth quarter should have been posted in earlier quarters.

GM said the adjustment will not affect its 2004 annual results, cash flow or year-end financial position. But another, unrelated adjustment -- an after-tax charge of $886 million, or $1.56 a share, for its February settlement with Fiat -- was taken retroactively in the fourth quarter and caused an earnings restatement.

Because of the Fiat charge, GM's 2004 net result was reduced to $4.95 a share from $6.51 a share.

Fiat and GM dissolved their partnership Feb. 13, including an option that could have forced GM to buy the 90 percent of Fiat Auto SpA that it did not already own. GM agreed to pay the Italian automaker $2 billion, mostly in exchange for canceling the clause.

After GM lowered its guidance, Standard & Poor's said it was revising its ratings outlook for the automaker to negative from stable, reflecting concerns about the company's profit potential. S&P's decision could foreshadow a downgrade of its rating on GM debt to junk status, which would significantly increase GM's borrowing costs.

S&P said GM's consolidated outstanding debt totaled $301 billion at the end of 2004.

"We now view the rating as tenuous," said S&P credit analyst Scott Sprinzen. "The rating could be lowered at any point if we came to doubt GM was on a trajectory to improving its financial performance to more satisfactory levels in 2006 and beyond."

The automaker said its finance arm, GMAC, as well as its other sales regions, were on track to meet 2005 income targets.

But production cuts in North America in the first and second quarters of this year, coupled with extremely competitive pricing, forced GM to sharply revise its earnings forecast.

"GM North America is, simply put, our 800-pound gorilla, and today's announcement really shows how important it is we get this business right," Wagoner said in a conference call with Wall Street analysts and automotive journalists.

GM's profit fell 37 percent in the fourth quarter, and the automaker had said it expected a rough start this year.

Still, Wagoner acknowledged the company "obviously underran our share and sales targets" for January and February. GM's U.S. sales were off 6.2 percent in the first two months of 2005, contributing to already inflated inventories and prompting the production cuts.

GM's previous first-quarter guidance was based on North American production volumes of 1.5 million vehicles. Since then, production schedules have been cut by about 70,000 units.

GM last week announced a new round of incentives designed to move slow-selling vehicles off dealer lots.

John Devine, GM's chief financial officer, said the pricing environment means the company must seek ways to cut costs.

"While we've made good progress in reducing costs over the last several years, the projected loss in North America reinforces our need to do much more, particularly in the area of health care," he said.

GM said it was encouraged by the "building momentum" of some recently introduced vehicles, including the Chevrolet Equinox, Pontiac G6, Buick LaCrosse and Chevrolet Cobalt, and by product launches scheduled for this year.

"We're staying the course on our key product programs and, in fact, are planning to accelerate the introduction of some of our most important launches," Wagoner said.

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