General Motors Corp.'s already fragile turnaround is in for a bruising 2008, when slow auto sales, a collapsing housing market and across-the-board uncertainty are expected to threaten hard-won gains of the past year.
GM's stunning news that it would take a $38.6 billion hit for a tax-related accounting charge wasn't the biggest problem in the company's third-quarter earnings report yesterday.
GM lost $1.6 billion in the third quarter, excluding special items and one-time charges, bringing a sudden end to a string of profitable quarters and erasing gains made in the first half of 2007.
More tough times are likely ahead. The U.S. auto industry's sales slump of 2007 is expected to continue - if not worsen - well into next year.
Commodity prices continue to soar beyond expectations. Volatile gas prices are again making U.S. consumers jittery. And the housing market crisis, which cost GM $757 million in the third quarter through its partial ownership of the GMAC financial unit, is showing no signs of letting up.
"We do have concerns over near-term economic conditions," GM Chief Financial Officer Frederick A. "Fritz" Henderson said in a conference call. "The overall pace of economic activity is certainly below our expectations."
In total, GM posted a record $39 billion third-quarter net loss, which included the $38.6 billion charge related to future tax benefits. The loss is the worst in GM's history.
The tax credit could have been used to offset taxes on future earnings and will be restored if GM posts three consecutive years of profitable quarters. GM's Henderson said the charge is an accounting adjustment and doesn't affect the automaker's cash flow or long-term prospects for profitability.
Many on Wall Street, however, were interpreting the charge as an indication that GM's situation is worse than initially believed.
Moody's Investors Service lowered its credit ratings outlook for GM to "stable" from "positive." GM shares fell more than 6 percent, or $2.21, to close at $33.95 on the New York Stock Exchange.
"We simply aren't inclined to look through the root cause as just 'noncash, nonrecurring' items," wrote Bear Sterns analyst Peter Nesvold in a research note.
"As we noted last week, fundamental pressures appear to be coming on even faster and stronger than we thought when we downgraded GM shares [three weeks ago]," Nesvold wrote.
Excluding the tax charge and other special items, including a $3.5 billion gain on the sale of GM's Allison Transmission business, the automaker's $1.6 billion loss compares with earnings of $497 million for the third quarter last year.
GM's critical North American operations lost $247 million on continuing operations in the quarter, a substantial improvement from $660 million in losses in the quarter last year.
GM said the progress is largely a result of higher average transaction prices on vehicle sales and a better mix of sales to retail consumers and fleet customers.
GM Europe lost $90 million, excluding one-time and special charges, compared with a $39 million loss in the third quarter of 2006.
GM reported operating gains elsewhere in the world. The automaker made $138 million in the Asia Pacific region, up from $57 million a year ago. Profits in Latin America, Africa and the Middle East rose to $340 million, from $183 million.
Overall, however, GM's quarterly results were far worse than Wall Street predicted. The news cast doubt over GM's restructuring plan, which delivered three consecutive profitable quarters, along with a landmark cost-cutting labor deal with the United Auto Workers, stable U.S. market share and product successes.
Henderson acknowledged that economic conditions had worsened beyond GM's expectations going into the year.
U.S. auto sales are likely to end 2007 at a nine-year low of about 16 million cars and trucks, reflecting the impact of high gas prices and a slumping U.S. housing market.
"We certainly didn't foresee a 16-million market," Henderson said. "We certainly didn't foresee the housing problems. We have to base the business on the reality of today."
GM lost a combined $12 billion in 2005 and 2006 after a long slide in its U.S. market share, but earned $953 million in the first half of 2007, a gain wiped out by the third-quarter loss.
The automaker expects a boost in profits once cost-cutting moves take hold.
The UAW contract, ratified last month, is expected to slash labor costs by creating a second-tier of lower-paid workers and calling for a buyout program to clear out senior workers. The deal also shifts $47 billion in retiree health care costs into a company-financed, union-run trust.