GM Reports $39 Billion Loss on Deferred Tax Charge (Update8)

By Jeff Green and Greg Bensinger


Nov. 7 (Bloomberg) -- General Motors Corp., the world's largest automaker, reported a record $39 billion quarterly loss after three money-losing years forced the company to write down the value of future tax benefits.

The loss, excluding the tax writedown, was $2.80 a share, more than 12 times analysts' estimates. Mortgage-related losses at GM's partly owned finance unit overwhelmed auto sales that were the highest ever. GM shares fell the most in 13 months, giving the Detroit-based automaker a market value of $19.2 billion, about half the size of the third-quarter loss.

GM signaled that it won't generate enough earnings to use the benefits. Chief Executive Officer Rick Wagoner cited concerns about defaults on subprime mortgage loans at GMAC LLC and auto sales in the U.S. and Germany. Slumping U.S. sales in the past half year ``feel like the conditions we're going to face,'' Wagoner said.

``This all suggests that GM thinks that things are so ugly out there that they can't see the possibility of profitability for many quarters, maybe even years,'' Bradley Rubin, an analyst with BNP Paribas in New York, said in an interview.

GM had a net deficit of $757 million related to its 49 percent holding in GMAC, which posted a $1.6 billion third- quarter loss on Nov. 1 because of mortgage losses at the Residential Capital LLC unit. GM sold the majority stake in GMAC last year to a group led by Cerberus Capital Management LP.

Standard & Poor's equity analyst Efraim Levy lowered his rating on GM shares to ``sell'' from ``hold'' today on concerns about 2008 sales volume in the U.S. and Germany and the weakened housing market. Levy, based in New York, cut his earnings-per- share estimate for 2008 by 34 cents to $3.96.

Loss Widens

GM's loss of $68.85 per share, the fourth-largest quarterly loss among S&P 500 companies since 1990, widened from a deficit of $147 million, or 26 cents, a year earlier. The non-cash charge of $38.6 billion is related to deferred tax assets in the U.S., Canada and Germany, the automaker said in a statement today.

The biggest quarterly loss was $54.2 billion from Time Warner Inc. in 2002. GM's biggest previous loss was $21 billion, stemming from an accounting change in the first quarter of 1992.

The results also reflected an after-tax gain of $3.5 billion from the sale of its Allison Transmission unit, $1.6 billion in pension-service costs related to prior labor agreements, and $350 million in charges connected to its bankrupt former partsmaking unit, Delphi Corp.

Record Revenue

GM's automotive revenue rose 8.7 percent to $43.1 billion, a third-quarter record, and automotive operations excluding the tax cost had net income of $122 million. The automotive loss a year earlier was $455 million. Auto losses in North America narrowed.

About $700 million of GM's adjusted loss of $1.6 billion was also related to the tax changes, Chief Financial Officer Fritz Henderson said on a conference call.

``Most of the decision for the write-off is driven by history, the fact that we've had a three-year cumulative loss,'' Wagoner said.

GM declined $2.21, or 6.1 percent, to $33.95 at 4:01 p.m. in New York Stock Exchange composite trading, for the biggest percentage decline since Oct. 6, 2006.

GM's 8.375 percent note due July 2033 fell 1.75 cents to 88 cents on the dollar, yielding 9.6 percent, according to Trace the NASD's bond-price reporting service. S&P cut GM debt to non- investment grade for the first time in May 2005 and currently rates it ``B,'' or five steps below investment grade.

Credit-default swaps tied to GM climbed 41 basis points to 602.1 basis points, the highest in seven weeks, according to CMA Datavision in London. An increase signals declining investor confidence in the company's ability to pay back its debt.

The $2.80-a-share loss compared with a 22-cent average estimate of 15 analysts surveyed by Bloomberg.

Toyota Battle

During the third quarter, GM outsold Toyota Motor Corp. to regain the lead in 2007 global sales and maintain its title as the world's top-selling automaker. Toyota today said its second- quarter profit rose 11 percent to 450.9 billion yen ($4 billion), beating analysts' estimates. Toyota's operating profit in Asia more than doubled, helping offset a decline in North America.

The current U.S. automotive sales pace of about 16 million a year is likely to hold for next year, Wagoner said. Since 2000, the U.S. annual average has been 16.9 million vehicles, including 16.6 million last year.

Henderson said the losses at GMAC's mortgage unit and a strengthening Canadian dollar against the U.S. dollar were significant factors in the wider-than-expected loss. The Canadian currency has risen 26 percent against the U.S. dollar this year.

``GMAC traditionally has been a solid and big earner for us,'' Wagoner said. ``With this dislocation in the mortgage market, it's made it quite a bit harder to plan on the profit flow from them.''

`Cumulative Loss'

The automaker attributed the tax charge to a ``three-year historical cumulative loss'' in the U.S., Canada and Germany.

Under U.S. accounting rules, GM assesses the need each quarter for a so-called valuation allowance against the deferred tax assets. In 2005, GM took a valuation against tax assets in South Korea that it reversed last year when the outlook for profits improved. The automaker also absorbed a similar charge in Brazil in 2005 and reversed it a year later.

Henderson said he couldn't estimate when GM might be able to use the deferred tax assets again and declined to forecast when the automaker might return to profit.

``Certainly having ResCap turn into the red, then bringing GMAC into the red, has an impact on us,'' he said.

Change of Plan

GM said it previously had determined it wouldn't need the allowance for the U.S., Canada and Germany because losses over the three-year period were caused by one-time expenses and because of the continued expectation of strong profits at GMAC and improved earnings in North America.

``The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude us from using our loss carryforwards or other deferred tax assets in the future,'' Henderson said in the statement.

The allowance also doesn't ``reflect a change in the company's view of its long-term automotive financial outlook,'' Henderson said.