General Motors Corp. managed to reduce the flow of red ink in the first quarter, significantly narrowing its losses as a major restructuring began to take hold, but the world’s biggest automaker acknowledged it still has a long way to go before it returns to profitability.
“We’re still burning cash. We’re still not comfortable where we are with our cash flow,” GM Chief Financial Officer Frederick “Fritz” Henderson.
Wall Street analysts said the results were better than expected, but they warned that GM faces significant headwinds, including rising gas prices that could hurt a new lineup of sport utility vehicles and ongoing negotiations over wages at Delphi Corp., GM’s former parts division. GM is expected to be on the hook for billions of dollars in Delphi labor and pension costs.
GM reported a first-quarter loss of $323 million, or 57 cents per share, on Thursday. While it was GM’s sixth straight quarterly loss, it was an improvement over the January-March period of 2005, when GM lost $1.3 billion, or $2.22 per share, and stopped providing financial guidance.
“The first quarter represented an important milestone in GM and GM North America’s turnaround,” GM Chairman and Chief Executive Rick Wagoner said in a statement.
“We are pleased to see results improve, but our enthusiasm is tempered by several factors,” Morgan Stanley analyst Jonathan Steinmetz said in a note to investors. Steinmetz said GM’s high production levels boosted profits in the first quarter but are likely to decline now that the automaker has built up inventory.
Henderson said GM is concerned about gas prices but believes there is still demand for full-size SUVs.
“There are still customers who want the full-size sport ute and we have no intention of walking away from that,” Henderson said.
The Detroit-based automaker, which lost $10.6 billion in 2005, is in the midst of a major North American restructuring that calls for cutting 30,000 jobs and closing 12 facilities by 2008. GM said restructuring charges for North America, Europe and elsewhere totaled $111 million.
Included in the first-quarter results was a one-time pretax charge of $1 billion for expenses related to a recent settlement that requires hourly retirees to pay more for their health care. GM must contribute $3 billion to a fund for retiree health care by 2011. GM expects the settlement will save $750 million per quarter, but not until the second half of this year.
GM also is waiting to reap financial benefits from some of its other restructuring efforts, including a buyout offer made this spring to its 113,000 U.S. hourly employees. GM expects to see a windfall in the fourth quarter, when its $14 billion deal to sell a 51 percent stake in its financial arm, General Motors Acceptance Corp., is expected to be completed.
But some of GM’s restructuring actions are already contributing to the company’s bottom line. The new lineup of SUVs and a pullback on expensive incentives helped raise GM’s average price per vehicle by $1,000 for the quarter, to $19,960. GM also realized gains from the sale of noncore assets like its stake in Suzuki Motor Corp., which fetched $317 million.
Quarterly revenue rose to a record $52.2 billion from $45.8 billion a year ago, thanks in part to strong sales outside North America. While U.S. sales were down 5 percent in the January-March period, that was offset by increased sales in China and other developing markets, GM said. The company’s global market share was flat at 13 percent.
GM’s struggling North American division reported a loss of $946 million, compared to a loss of $1.5 billion a year ago. Henderson said GM is on track to meet its goal of $4 billion in cost reductions by the end of this year.
“It’s a quarter of good, solid progress,” he said. “Obviously, the job’s not done.”
GMAC earned $605 million for the quarter, down from $728 million a year ago as mortgage earnings took a hit due to higher interest rates. Mortgage earnings slipped by more than half to $206 million. GMAC remained a heavy contributor to GM’s bottom line in the first quarter, pitching in an estimated $1.07 per share, but that will change when the majority stake in GMAC goes to new owners, Merrill Lynch analyst John Murphy said.
“This will raise much needed liquidity but will push GM’s largest profit contributor for years out the door,” Murphy said in a note to investors.
GM hasn’t provided earnings guidance since last April, and Henderson said the company doesn’t plan to provide guidance for the rest of this year. Henderson said it would be inappropriate for GM to issue guidance until it comes to a resolution with Delphi.
Delphi wants to lower hourly workers’ wages and has asked a federal bankruptcy court to throw out its union contracts. If those contracts are voided, the United Auto Workers and other unions have threatened a strike that could devastate GM.
Henderson said Delphi, GM and the UAW are continuing to talk and he is confident they will reach a resolution without a strike.