GM Posts 2Q Loss of $3.2 Billion Because of Heavy Charges for Layoffs and Early Retirements

DETROIT (AP) -- General Motors Corp. lost $3.2 billion in the second quarter because of heavy charges for layoffs and early retirements -- part of its massive restructuring program. But, without those charges, the world's largest automaker scored a profit that blew Wall Street away and bolstered management's claim that the turnaround is working.
ADVERTISEMENT


GM shares rose $1.34, or 4.4 percent, to close at $32 on the New York Stock Exchange. They have traded in a 52-week range of $18.33 to $37.57.

The loss of $5.62 per share in the April-June period compared with a loss of $987 million, or $1.75 per share, for the same period last year.

Without one-time items, GM said it earned $1.2 billion, or $2.03 per share. That was significantly ahead of the 55 cents per share forecast in a survey of Thomson Financial analysts.

Revenue climbed to $54.4 billion, compared with $48.5 billion in the second quarter of 2005.

In North America, excluding special items, GM lost $85 million -- $1.1 billion less than it lost in the second quarter of 2005.

"Conventional wisdom is that you can't turn a ship as big as GM around quickly," GM Chairman and Chief Executive Rick Wagoner said in a statement. "We aim to prove that conventional wisdom wrong."

GM, which lost $10.6 billion last year, launched a major restructuring in November that called for closing 12 plants by 2008 and slashing its work force and structural costs. In recent months it has logged several milestones in the turnaround, including a deal with the United Auto Workers that reduced health care costs and an extensive program of early retirements and buyouts, under which 34,400 hourly workers left.

The cost of the retirement and buyout program accounted for $3.7 billion out of $4.3 billion in special charges that GM took in the second quarter.

Chief Financial Officer Frederick "Fritz" Henderson characterized the quarter as one of "good, solid progress," driven largely by cost savings -- even though GM is expecting most of its cost reductions to take effect in the second half of the year.

"We gotta keep making progress on the revenue side to get the business turned around," he told reporters at GM's Detroit headquarters.

Wagoner said Wednesday the company had increased its target for reducing annual costs in North America to $9 billion from $8 billion this year. Some $6 billion of that will affect the bottom line in 2006, instead of a previously expected $5 billion.

Henderson said much of the savings came from lower warranty costs, which he attributed to quality improvements.

Sales volumes in North America were flat, but per-vehicle revenue increased because more of the vehicles sold were high-margin sport utility vehicles, Henderson said. GM launched a refreshed lineup of full-size SUVs this year.

"The Yukon, Yukon Denali, Escalade, Tahoe, Suburban, Avalanche -- we love them," Henderson said. "So do customers. That's even more important."

That message contrasted with last week's earnings report from rival Ford Motor Co., which attributed its $123 million second-quarter loss to the market's rapid shift away from trucks and SUVs because of high gas prices.

Rebecca Lindland, an auto analyst at Global Insight, an economic research and consulting company, said GM did well in SUVs because its models were new and early buyers tend to load up on extra features. At the same time, GM crossovers hitting showrooms later this year will help the company catch buyers migrating away from SUVs to the more fuel-efficient vehicles.

"GM's product lineup ... is just a lot stronger than Ford's," Lindland said.

But not all analysts were enthusiastic about GM's performance, questioning how sustainable the improvement is.

Goldman Sachs analyst Robert Barry noted that higher material and shipping costs had offset the increased per-vehicle revenue.

"This does not bode well for the sustainability of earnings from the new products -- especially because revenue per unit on new products tends to fall off as early adopter momentum fades but higher raw material and freight costs may not," he wrote in a research note.

GM is currently in talks with Nissan Motor Co., of Japan, and Renault SA, of France, about the possibility of joining their global alliance. Wagoner has said that while he believes it makes sense to examine whether there are potential benefits from a linkup, he does not want to get distracted from the turnaround plan.

The idea to join the alliance came from billionaire investor Kirk Kerkorian, who holds a 9.9 percent stake in GM. The proposal has fueled speculation that Kerkorian is dissatisfied with the pace of the turnaround under Wagoner and wants to carve out a role for Nissan and Renault CEO Carlos Ghosn, a legendary turnaround specialist in the industry.

The strong second quarter strengthened Wagoner's position, Lindland said.

"If the results had been the opposite, people would have been calling for his head," she said.

Kerkorian's private equity firm, Tracinda Corp., had no comment on GM's results.

Another looming issue for GM is the future of its biggest supplier, Delphi Corp., which is in bankruptcy protection. The automaker is involved in three-way talks with Delphi and the UAW to try to avoid a strike, which would cripple GM.

"It's still a question mark: What's the final cost?" Henderson said of Delphi.

GM has already agreed to pay for buyouts for Delphi workers, which significantly reduced the threat of a strike, but the parties still need to work out an overall deal. A bankruptcy judge is set to consider on Aug. 11 whether to allow Delphi to throw out its labor contracts, which could trigger a strike.