G.M. Profit Down 90% From 2006

The General Motors Corporation reported a 90 percent decline in first-quarter profit today as losses at its finance arm overshadowed the gains from restructuring its automotive operations.

G.M., which fell behind the Toyota Motor Corporation in the first quarter to become the world’s second-largest automaker, posted net income of $62 million, or 11 cents a share, compared with $602 million, or $1.06 a share, in the same period a year earlier. It was the company’s second consecutive quarterly profit, but the number was weighed down heavily by losses from subprime mortgage loans made by the General Motors Acceptance Corporation.

G.M., which sold a majority stake in G.M.A.C. last fall to a group of investors led by Cerberus Capital Management, recorded a net loss of $115 million from G.M.A.C. — 49 percent of the unit’s $305 million loss — compared with the venture’s earnings of $495 million in the quarter a year earlier.

The G.M.A.C. divestiture led to a 16 percent decline in G.M.’s first-quarter revenue, to $43.9 billion from $52.4 billion.

G.M. improved its performance considerably in North America, the focus of its turnaround effort, but remained in the red. Reductions in health care spending and reductions in marginally profitable sales to rental-car companies helped G.M. narrow its North American losses to $85 million from $251 million in the first quarter of 2006.

“It’s good to see the improvement, but it’s not good to be operating at a small loss,” the chief financial officer, Frederick A. Henderson, said on a conference call with reporters and analysts this morning. “We have to continue to make significant improvements.”

The loss in North America is concerning to Jonathan Steinmetz, an analyst at Morgan Stanley in New York, who had expected G.M. to instead report a $122 million profit in the region. That shortfall could signify trouble later this year if demand for vehicles softens because of high gas prices and a stumbling housing market.

“G.M. is still burning cash near the peak of its product cycle,” Mr. Steinmetz wrote in a report to clients today.

In 2006, G.M. cut its fixed costs in North America by $6.8 billion, largely through buyout and early retirement package offers that were accepted by about 35,000 of its hourly workers. Mr. Henderson said G.M. was on track to achieve its goal of cutting $9 billion in annual costs by the end of this year.

He described the company, which reported losses of $10.4 billion in 2005 and $2 billion last year, as “operating at or close to break even.”

Excluding special items that G.M. said were largely related to restructuring in its Europe and Asia-Pacific regions, the company earned $94 million, or 17 cents a share, well below the 87 cents a share that analysts had expected. As a result, G.M. shares were down $1.40, or 4.3 percent, to $31.04 a share at midday on the New York Stock Exchange.

G.M.’s stock had risen in recent days on the anticipation of a significantly improved first-quarter performance, helping drive Wall Street to record highs. But on Wednesday, analysts noted the effect of the subprime mortgage business on results at G.M.A.C., the first inkling that G.M. most likely had a disappointing quarter.

G.M.’s report came a week after the Ford Motor Company reported a first-quarter loss of $282 million, compared with a loss of $1.4 billion a year earlier. Even though G.M.’s performance in the quarter was better, investors were more pleased with Ford because it improved so dramatically.

The second quarter is off to a rocky start for both automakers, at least in terms of sales in the United States. Ford’s sales fell 7 percent in April, while G.M.’s were down 2 percent. “It’s fair to say the U.S. market isn’t very robust,” Rick Wagoner, the chief executive of G.M., said during an interview on CNBC, the financial news cable network, citing gas prices that have topped $3 a gallon in many parts of the country as one reason.

But that is slightly less of a concern for G.M. than for Detroit’s other automakers, because G.M. now sells more than half of its vehicles abroad.

Globally, G.M. increased sales 3 percent in the first quarter, to 2.26 million vehicles, but could not keep up with surging Toyota, which sold 2.35 million. G.M. had been the world’s largest automaker since 1931, save for brief periods in the 1970s and 1990s when strikes among G.M. workers allowed Ford to claim the top spot.

G.M.’s biggest problem in the quarter, however, was unrelated to its core automobile business.

G.M.A.C. said its mortgage division, Residential Capital, had losses of $910 million, while net income from automotive financing, insurance and other operations was $605 million, more than double the earnings those divisions generated in the first quarter of 2006. G.M.A.C. said it expected improved results from the mortgage division in the second quarter.

Source : http://www.nytimes.com