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GM to take $39bn noncash charge in third quarter

GM to take $39bn noncash charge in third quarter
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First Published: Wed, Nov 07 2007. 03 28 PM IST
Updated: Wed, Nov 07 2007. 03 28 PM IST
Detroit: General Motors Corp. said it will record a $39 billion (net noncash charge for the third quarter because of negative changes in its historical three-year cumulative loss.
The charge means that GM will report a huge net loss for the third quarter when it releases its earnings Wednesday morning, an industry analyst said.
“The bottom-line net loss for the quarter will be somewhere south of $39 billion (euro26.81 billion) because this is a net charge that they’ve taken against their deferred assets,” Burnham Securities analyst David Healy said Tuesday.
GM spokeswoman Julie Gibson said the company would not state its earnings until Wednesday.
“It does not affect our cash liquidity position, our ability to operate and make investments, or our outlook on the company’s future, which remains positive,” she said.
The charge is related to establishing a valuation allowance against deferred tax assets in the U.S., Canada and Germany, the company said in a statement. A valuation allowance is taken when the future benefit of the deferred tax assets is less likely to be realized.
GM had determined in the past that a valuation allowance was not necessary for deferred tax assets in the three countries, the statement said. But because of recent events and developments in the third quarter, GM must establish the allowance under accounting guidelines.
“In this quarter, due to some events that happened during the quarter, we had to take the valuation against deferred assets,” said spokeswoman Rene Rashid-Merem.
GM’s statement says that the company’s three-year historical cumulative loss in the third quarter helped to trigger the valuation allowance.
Another factor was weakness at GMAC Financial Services and its mortgage business, Residential Capital LLC, or ResCap, the statement said.
GMAC Financial Services on Thursday posted a $1.6 billion (euro1.1 billion) loss for the third quarter. It included a $2.3 billion (euro1.58 billion) loss at ResCap, which offset profits elsewhere.
GMAC was formerly controlled by GM. Cerberus Capital Management LP and other private-equity firms bought a 51 percent stake in GMAC in November 2006, before weakness in the mortgage industry became widely known. GM maintains a 49 percent stake.
In the past, GM counted the deferred tax assets as assets on its balance sheet, but now must take the assets away through a valuation allowance, which is a liability on the company’s books, Gibson said.
“That ultimate figure is going to show up in retained earnings,” she said.
GM’s statement also said the company faces more challenging near-term automotive market conditions in the U.S. and Germany.
Healy said he was expecting a small loss for the quarter, excluding special items such as the noncash charge.
Seventeen analysts polled by Thomson Financial expected the company to lose 11 cents a share for the July-September period without special charges. The company previously had posted three straight quarters of net profits.
The charge doesn’t mean that GM’s turnaround has stalled, but it is a vote of no confidence in the company’s short-term future as the U.S. auto market continues to decline, Healy said.
“I think the long-term outlook for the auto business is improved because of the favorable parts of the labor settlement” with the United Auto Workers union, he said.
Robert Toomey of Seattle-based E.K. Riley Investments LLC said that based on a preliminary review of GM’s statement, the charge shouldn’t have much of an impact on its shares.
“If it has no affect on their ability to operate, invest or access credit, then at the moment I don’t see it as a big deal. I see it as an accounting adjustment. The past is yesterday. The market looks forward. Companies make these accounting adjustments all the time,” Toomey said.
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First Published: Wed, Nov 07 2007. 03 28 PM IST