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March 20, 2005

General Motors

Lee Hawkins of the Wall Street Journal reports on GM:

GM Cuts Outlook For 2005 Profit: General Motors Corp. rattled financial markets as it slashed its earnings estimates for the first quarter and full year of 2005.... GM faces a 'perfect storm' of health-care and pension costs and rising commodity prices.... GM continues to see its market share fall and inventories of unsold vehicles in North America rise. New models it has touted have failed to grab consumers' attention. It faces increased competition from nimbler overseas rivals, especially Japan's Toyota Motor Corp., and is burdened by heavy costs from health-care and pension obligations to its 1.1 million employees, retirees and their dependents....

In a conference call yesterday, Mr. Wagoner and John Devine, GM's vice chairman and chief financial officer, said swifter and starker changes are needed to restore GM's profitability in North America. 'We made a lot of progress on reducing structural costs, but what we saved on the operating side has been filled in by higher legacy costs,' Mr. Wagoner said, using a shorthand term for the comparatively rich health and pension benefits that are a legacy from the days when GM controlled more than 40% of the U.S. market.... Mr. Wagoner faces significant hurdles in turning GM around. Weighed down by high health-care costs and pension obligations, the company is struggling to compete with lower-cost rivals, led by Toyota... new models that GM executives said would turn the tide for the company have yet to deliver significant enough gains to offset slumping demand for older models. Sales of large SUVs such as the Chevrolet Suburban and GMC Yukon, GM's highest-profit vehicles, have collapsed as gas prices have risen and competition has increased from lighter, more maneuverable crossover wagons that offer many of the functions of a larger SUV....

Mr. Wagoner has overseen strong gains by GM in productivity and steady progress on product quality. But those improvements haven't slowed GM's slide in U.S. market share. The auto maker's share fell to 25% at the end of February, down from nearly 33% a decade ago....

In its warning, GM said it expects to incur a loss of $1.50 a share in the first quarter of 2005, excluding special items, compared with a previous estimate of break-even or better. The company also lowered its full-year expectation to $1 to $2 a share from a previous estimate of $4 to $5 a share, and said that instead of generating $2 billion in cash this year, as previously forecast, it will burn $2 billion in cash. In 2004, GM reported net income of $3.7 billion, or $6.51 a share.

The fiscal year before last GM pulled in about $20 billion, of which $2 billion went to the pension plan, $5.5 billion to health care (for current workers and for the 2.3 retirees for every current worker), $9.5 billion to bondholders, and $0.7 billion to the tax guys--leaving $2.8 billion for the shareholders (on an equity base now valued at some $16 billion).

With stockholders receiving only 15% of the surplus from the business and yet having 100% of the votes, it doesn't look like a stable situation: there are enough flaws in our form of corporate governance to lead me to suspect that someone is likely to try something to redivide the GM surplus pie over the next five years. But it's not clear to me what, exactly.

Annual Financials for General Motors Corporation: Fiscal Year-End:12/31 
 All amounts in millions except per share amounts.
2003  2002  2001  2000 
  12/31/2003 12/31/2002 12/31/2001 12/31/2000
 Net Sales 185,524.0 177,324.0 169,051.0 184,632.0
 Cost Of Goods Sold 152,071.0 146,793.0 138,847.0 145,664.0
 Gross Profit 33,453.0 30,531.0 30,204.0 38,968.0
 SG and A Expenses 21,008.0 20,690.0 19,433.0 22,252.0
 R and D Expenditures - - - -
 Depreciation and Amortization - - - -
 Income Before Depreciation and Amortization 12,445.0 9,841.0 10,771.0 16,716.0
 Interest Expense 9,464.0 7,503.0 8,317.0 9,552.0
 Investment Gains (Losses) - - - -
 Total Operating Expenses 30,472.0 28,193.0 27,750.0 31,804.0
 Non-Operating Income - - - -
 Other Income 612.0 281.0 -138.0 -319.0
 Income Before Tax 2,981.0 2,338.0 2,454.0 7,164.0
 Provision For Income Taxes 731.0 644.0 1,094.0 2,393.0
 Income After Tax 2,250.0 1,694.0 1,360.0 4,771.0
 Minority Interest - - - -
 Net Income Before Extra Items 2,862.0 1,975.0 1,222.0 4,452.0
 Extra Items Discontinued Operations 960.0 -239.0 -621.0 -
 Net Income 3,822.0 1,736.0 601.0 4,452.0

Posted by DeLong at March 20, 2005 07:44 PM