Red Ink Drowns GM

The automaker's woes continue to spiral as it caps off a difficult year with a $4.8 billion loss.
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General Motors

(GM) - Get Report

capped off one of the most difficult years in its long history Thursday, reporting a massive fourth-quarter loss that was far worse than what Wall Street was expecting.

GM lost $4.8 billion, or $8.45 a share, in the quarter, its fifth straight quarter in the red. The results included charges of $3.6 billion, or $6.36 a share, for certain items, such as a benefit restructuring with its union and at

Delphi

. Excluding items, GM lost $1.2 billion, or $2.09 a share, in the fourth quarter, badly missing the Thomson First Call loss estimate of 16 cents a share. The company earned $726 million, or $1.28 a share, on an adjusted basis in the year-earlier period.

Shares of GM were recently down $1.56, or 6.5%, to $22.29. The stock made gains earlier in the week after GM's counterpart

Ford

(F) - Get Report

reported better-than-expected results for the quarter, but hopes for anything positive to come out of GM's earnings report evaporated before Thursday's opening bell.

"Clearly, the scope of GM's problems are larger

than Ford's, and the number of issues that GM's business is facing just keeps getting larger," said Morningstar analyst John Novak.

GM's losses were led by its North American division, which recorded an adjusted loss of $1.5 billion in the quarter, compared with $268 million a year earlier. Globally, GM's automotive operations reported an adjusted loss of $1.5 billion during the quarter, compared with adjusted earnings of $268 million a year ago.

The company's financial division, GMAC, boosted GM's overall results with a quarterly profit of $614 million, down from last year's $683 million. While the mortgage and insurance unit remains GM's most profitable subsidiary, the company is seeking to sell a portion of it in order to free the business from the automaker's bad debt ratings.

"This is unacceptable," said GM's new chief financial officer, Fritz Henderson, on the company's conference call. "We do expect to improve financial results in 2006 and 2007. There's really no other choice."

Speculation about bankruptcy at GM, the largest debt issuer in the U.S., has become commonplace on Wall Street after its shares plummeted 48% in 2005 on dwindling market share and a consistent string of heavy profit losses. The company boasts a cash cushion of $20.5 billion on its balance sheet, but its legacy and health care costs are soaring, and its credit ratings have been cut to junk.

Thursday's results illustrated the company's deteriorating financial health and could lend credibility to a plan trumpeted by Kirk Kerkorian's Tracinda Corp. that calls for cutting the company's annual dividend in half. Tracinda, which owns a 9.9% stake in the automaker, recently said GM should adopt a comprehensive "equality of sacrifice" plan to revive its business. In addition to a dividend reduction, the plan includes making "substantial" reductions in payments and salaries for the company's top brass.

Tracinda also has had talks with GM about gaining a spot on the company's board, but the effort so far has been unsuccessful.

"We had discussions with Tracinda back in December about

Jerome York joining our board of directors, but we were unable to reach a mutually satisfactory agreement at that time," says GM spokeswoman Toni Simonetti. "We certainly left open the possibility for discussions about this matter in the future, so I would say that's still the case."

Novak said he expects GM to cut its dividend, which currently yields an annual return of 8.7%, for symbolic reasons sometime in 2006.

"It would help conserve some cash, but in the grand scheme of things, it would help show that shareholders are sharing the pain and it's not just the UAW that is absorbing some of the hits here," Novak said. "A 4.5% yield, even after a 50% cut, would not be so bad."

In addressing its profit issues, GM has highlighted its spiraling health care and legacy costs as it has negotiated with the United Auto Workers to reduce the load. The company recently announced a plan to cut 30,000 jobs by 2008, and it also reached an agreement with the UAW that reduced short-term costs by about $3 billion. But the company needs more concessions, and it faces a new round of labor negotiations in 2007.

Its cash expenses for health care in 2005 totaled $5.4 billion, up from $5.2 billion in the previous year. Pension costs went down, but legislation is brewing in Congress that could change the rules by which GM reports its pension liability, and that would leave it heavily underfunded.

"We think we've done the right thing from a corporate perspective," said GM CEO Richard Wagoner on the call. "I think we've behaved very responsibly in terms of managing our affairs and making sure our pensions are properly funded."

On the sales side, GM's revenue totaled $51.2 billion in the fourth quarter, down from $51.4 billion last year. Volume levels held steady, but sales declines came in the product mix, thanks to a precipitous drop in sales of sport-utility vehicles in North America. GM's worldwide market share fell slightly to 14.2% from 14.4% in 2004.

"S.U.V. sales really affected results, and that really shows some of the mistakes they have made on the product side," Novak says. "One thing that struck me was the amount of uncertainty the company has going into 2006, in everything from their products to the Delphi labor issues and the sale of GMAC. The uncertainty here is growing."

Labor negotiations are expected to heat up for automakers in Detroit later this year and in 2007, and any breakdown in negotiations could pose the greatest risk to GM's liquidity.

"Any kind of a labor strike would really make GM's problems spiral out of control quickly," Novak said. "It looks like things are under control at Delphi, but you never know what will happen there."

On Wednesday, President Bush said Detroit shouldn't look to Washington, D.C., for help, according to

The Wall Street Journal

. Instead, he said, the U.S. automakers should develop "a product that's relevant."

"And I haven't been asked by any automobile manufacturer about a bailout," he added.