GM slashes earnings forecast (forsees $828 million 1st Qtr loss)

Declining sales and production cutbacks in North America are putting a huge crimp in General Motors’ earnings. That prompted the automaker on Wednesday to slash its expectations for this year.

GM expects to lose about $848 million, or $1.50 per share, in the first quarter excluding special items. In early January, the automaker had said it expected to break even for the quarter.

For the full year, GM now thinks it will post earnings in a range of $565 million to $1.13 billion -- or $1 to $2 per share -- excluding special items. That is a dramatic reduction from its earlier earnings forecast of $2.26 billion to $2.83 billion, or $4 to $5 per share.

In addition, GM foresees a $4 billion swing in its operating cash flow for the year -- from $2 billion to a negative $2 billion.

The automaker blamed lower sales in North America and a shift in the sales mix away from high-profit trucks to lower-profit cars for the earnings falloff.

GM's previous first-quarter earnings expectations were based on North American volume of 1.25 million vehicles. Since then, production schedules have been reduced by approximately 70,000 vehicles.

GM also expects negative operating cash flow in 2005 of approximately $2 billion, before the Fiat settlement and GM Europe restructuring, versus the previous target of positive $2 billion.

"Clearly we have significant challenges in North America. The rest of our automotive businesses, and GMAC, are running in line with, or ahead of, our expectations," said GM Chairman and CEO Rick Wagoner. "But North America is our biggest business, and the key driver of automotive earnings and cash flow. So it's important that we get this business right."

"The competitive environment that we face in North America means we must continue to find ways to reduce our costs and grow revenue," warned GM Vice Chairman and Chief Financial Officer John Devine. "While we have made good progress in reducing costs over the last several years, the projected loss in North America reinforces our need to do much more."

"One of the issues we've had for North America is the increasing drag of health-care costs on North American profitability," Devine added on the conference call with Wagoner.

"I don't have any silver bullets on heath care … but clearly I think the weakening profitability this year has focused on our need to make progress on health care."

GM, the largest private provider of health care in the United States, had warned earlier that its medical expenses would increase by about $1 billion this year.

GM said its other automotive regions and GMAC are all on track to meet or beat their 2005 net income targets.

Standard & Poor's on Wednesday revised its rating outlook on GM and its finance arm to negative from stable, setting the stage for a downgrade of the world's biggest carmaker to junk status.

A downgrade to junk status would likely significantly raise GM's borrowing costs. GM and its finance arm had about $300 billion in debt at the end of last year.

S&P said it views the rating as "tenuous" and could cut it at any time if it looked like GM was not on a trajectory to improve its financial performance in 2006 and beyond.

Moody's Investors Service and Fitch Ratings, which have GM's debt rated 2 and 3 notches above junk respectively, are likely to reconsider their ratings as well, analysts said.

Column: Current woes at GM and Ford can be traced to Roger Smith

http://www.mlive.com/business/statewide/rick_haglund/index.ssf?/base/business-0/1110319801129060.xml

Wednesday, March 09, 2005
By Rick Haglund
Considered a visionary leader, retired General Motors Corp. Chairman Roger Smith also was tagged with a truckload of costly corporate sins in what some called his decade-long "reign of error" in the 1980s.

Smith took heat for crippling the economy of Flint by drastically shrinking GM's footprint in its home city. And he spent billions in a futile attempt to diversify the automaker by purchasing Electronic Data Systems Corp. and Hughes Aircraft Co.

GM later sold off EDS and Hughes. But the automaker is still suffering from Smith's failed fantasy of replacing much of its hourly work force with robots and computer-controlled machinery that would churn out cars and trucks without so much as a bathroom break.

The unsurprising result of Smith's plans for fully automated "lights-out" factories: GM faced an enraged work force as the automaker entered negotiations with the United Auto Workers union in 1990.

Robert Stempel, who succeeded Smith as GM chairman that year, decided the only way he could keep labor peace was to sign a historic pact that required GM to pay workers whether or not their plants were operating.

Ford and the former Chrysler Corp. also were forced to sign similar contracts, shifting labor from a variable cost to a fixed cost.

Those fixed labor costs are now making it extremely difficult for GM and Ford to cope with slumping sales.

Earlier this month, GM and Ford announced production cuts in an effort to clear out bloated inventories of unsold cars and trucks.

GM also decided to shut down its Lansing Car Assembly operation months earlier than expected, putting 3,000 workers on temporary layoff.

Analysts would like to see even more plant shutdowns as Ford and GM bleed market share. But the two automakers have been reluctant to do so because they must pay hourly workers whether or not the plants are running.

Here's how the deal works:

Laid-off workers are placed in a "jobs banks" for up to 48 weeks. Drawing unemployment benefits from the government and supplemental unemployment benefits (known as SUB pay) from the automakers, they earn about 95 percent of normal take-home pay, or 70 percent of gross pay.

Ford had 1,092 workers in its jobs bank as of Feb. 27. GM won't release its number.

After 48 weeks, laid-off hourly workers go back on the payroll at full regular pay, regardless of whether there are jobs for them.

GM and Ford have been trying to avoid these costly layoffs by goosing sales with incentives such as zero-percent financing and hefty cash discounts.

But those incentives have been losing steam in recent months, forcing GM and Ford to reluctantly cut production.

Top executives at those automakers no doubt wish that Roger Smith had forged a more cooperative relationship with the UAW.

Contact Rick Haglund at (248) 540-7311 or e-mail him at rhaglund@boothnewspapers.com

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