Vendian

The New York Times Wednesday, April 20, 2005.

Detroit, Aprils 19 -- General Motors reported a $1.1 billion first-quarter loss on Tuesday, its worst quarterly performance since 1992, citing a stark reversal in its North American operations.

The company said it was not longer certain enough of its outlook to provide earnings guidance for the year, backing away from the bleak revisions it made last month.

G.M. also appeared to be inching toward a confrontation with the United Automobile Workers union over health care costs, which are expected to approach $6 billion this year. In explaining why it was not providing guidance, G.M. cuted "uncertainty affecting key elements of our financial forecast, such as resolution of the health care cost crisis."

To several analysts, that appeared to be the message that G.M. would continue to seek concessions on health care from its unions. Last week, union leaders said they woudl not agree to sharp cuts in health care benefits, though they did leave ground on modest concessions.

Steps that are only modest may not satisfy G.M.'s executives. Asked whether G.M. was pressing for more, John M. Devine, the chief financial officer, said in an interview, "we don't negotiate in the press."

"All we're saying is this is a serious issue for us," Mr. Devine said. "The combination of lower volumes and increasing health care costs has put our North American business in a vise."

Mr. Devine also said that for the first time since 2001, G.M. might withdraw money from a $20 billion reserve set aside for retiree health care expenses as one way of paying for rising health costs. The reserve, which was established in the late 1990's, does not need to be repaid.

Union officials had no comment Tuesday.

But some analysts said that the company's emphasis on rising health care costs did not explain the vanishing earnings projections, which are driven by a more fundamental problem: fewer Americans are buying G.M. cars and trucks.

"We continue to focus on G.M.'s market share and product," said Robert HInchliffe, an analysts at UBS, in a note to investors Tuesday. He added that, while "G.M. cites its health care cost crisis as a major source of uncertainty," he was not clear how it was that health care cost projections could have changed so unpredictably this year.

G.M.'s loss was in line with its profit warning of March 16 that led to a shake-up of its North American management and sent G.M. shares to a 12-year low last week. Tuesday's report further concerned analysts because of the lack of earnings guidance and the negative cash flow of $3.5 billion in the quarter, leaving about $20 billion on its automotive balance sheet.

"That's not something we can do on a regular basis," Mr. Devine said of the company's cash exodus.

After falling sharply early in the day, G.M. shares recovered to close down 10 cents, at $26.09.

The $1.1 billion net loss, or $1.95 a share, was in contrast to a profit of $1.21 billion, or $2.12 a share, in the first quarter of 2004. Special items included charges for revamping the troubled European operations and accelerated retirement packages offered to American white-collar workers. Excluding these, the company had operationg losses of $839 million, or $1.48 a share, in line with Wall Street estimates.

Those estimates have been dropping after G.M.'s warning in Marth that 2005 operating earnings would be $1 to $2 a share, down from an estimate of $4 to $5. G.M. also said then that its operations would eat up $2 billion in cash instead of generating $2 billion, as previously forecast.

But on Tuesday, with G.M. already having cash outflows of $3.5 billion, the company said it was not ready to provide new guidance.

Revenue fell 4.3 percent, to $45.77 billion in the quarter.

"G.M's decision to suspend guidance is an additional bad piece of news for the stock," wrote John Casesa, an analysist at Merril Lynch, in a note to investors. He added that the statements about health care suggested that "management is ratcheting up pressure on the U.A.W." to renegotiate its contract before it expires in 2007. Union leaders appeared to rule that out last week.

Health care costs are a substantial burden because G.M. provides coverage for 1.1 million Americans, including workers, retirees and their families. G.M. autoworkers do not pay deductibles or monthly premiums, though they do have co-payments for office visits and pharmaceuticals.

While G.M.'s North American resuslts continue to be hard to predict, the company said its other operations were in line with projections. The financing division remains a bright spot, if cooling slightly because of rising interest rates, reporting a $728 million profit, down from $764 million a year ago.

Asian operations reported a $60 million profit, down froma $275 million profit a year earlier, driven by a weakening Chinese market. Europeran operatiosn had a $103 million loss, slightly better than its $116 million less a year earlier. In Lating America, the company reported $46 million profit, up from $1 million a year earlier.

No business is more important to G.M. than the United States, where big sport utility vehicles and pickup turcks, along with returns from car loans, have driven profitability. But G.M.'s North American automotive operations reported a $1.3 billion net loss in the quarter in contrast to a $401 million profit a year earlier. Compteition from Asian rivals like Toyota have weakend the grip of G.M. on Ford Motor Company on the SUV market.

G.M.'s market share in the United States fell to 25.4 percent, from 26.7 percent a year ago, despite heavy spending on rebates and other sales incentives. Sales of large sport utilities, like the Chevrolet Suburban, have slowed, though G.M. executives have disputed the contention of many analysts that rising gas prices are playing a role.

The company is reallocation resources to rush a new generation of its large sport utility vehicles into production by the end of the year and says it believes that an influs of new products will revive demand.

"The results at G.M. North America were clearly dissapointing," Rick Wagoner, G.M.'s chairman and chief executive, said in a statement. He did not participate in Tuesday's conference call with financial analysts and the media.

Mr. Devine said two problems stand out in North America.

"We're absolutely focused ono getting our products right today and tomorrow, it's our No. 1 focus," he said, "but right behind it is adressing the health care crisis that we have."

He also reitereated that the company would not compensate a bankruptcy filing; most analysts have said that talk of bankruptcy is premature because G.M. has adequate cash reserves to survive for some time, though they also see no clear path to dramatic turnaround.

"Some companies use it as a business model to aviod emplyee liabilites," Mr. Devine said. "That's not the case for us. It wouldn't work. You might fly on a bankrupt airline, but you wouldn't buy a car from a bankrupt car company."

WHEW--that took forever to type. I should have just waited to get home an scan that in.
Vendian.