Declining sales and production cutbacks in North America are putting a huge crimp in General Motors earnings. That prompted the automaker on Wednesday to slash its expectations for this year.
GM expects to lose about $848 million, or $1.50 per share, in the first quarter excluding special items. In early January, the automaker had said it expected to break even for the quarter.
For the full year, GM now thinks it will post earnings in a range of $565 million to $1.13 billion -- or $1 to $2 per share -- excluding special items. That is a dramatic reduction from its earlier earnings forecast of $2.26 billion to $2.83 billion, or $4 to $5 per share.
In addition, GM foresees a $4 billion swing in its operating cash flow for the year -- from $2 billion to a negative $2 billion.
The automaker blamed lower sales in North America and a shift in the sales mix away from high-profit trucks to lower-profit cars for the earnings falloff.
GM's previous first-quarter earnings expectations were based on North American volume of 1.25 million vehicles. Since then, production schedules have been reduced by approximately 70,000 vehicles.
GM also expects negative operating cash flow in 2005 of approximately $2 billion, before the Fiat settlement and GM Europe restructuring, versus the previous target of positive $2 billion.
"Clearly we have significant challenges in North America. The rest of our automotive businesses, and GMAC, are running in line with, or ahead of, our expectations," said GM Chairman and CEO Rick Wagoner. "But North America is our biggest business, and the key driver of automotive earnings and cash flow. So it's important that we get this business right."
More cutbacks appear to be on the way.
"The competitive environment that we face in North America means we must continue to find ways to reduce our costs and grow revenue," warned GM Vice Chairman and Chief Financial Officer John Devine. "While we have made good progress in reducing costs over the last several years, the projected loss in North America reinforces our need to do much more."
"One of the issues we've had for North America is the increasing drag of health-care costs on North American profitability," Devine added on the conference call with Wagoner.
"I don't have any silver bullets on heath care but clearly I think the weakening profitability this year has focused on our need to make progress on health care."
GM, the largest private provider of health care in the United States, had warned earlier that its medical expenses would increase by about $1 billion this year.
GM said its other automotive regions and GMAC are all on track to meet or beat their 2005 net income targets.
Euro bonds of GM plummeted after the company announced its profit warning.
Standard & Poor's on Wednesday revised its rating outlook on GM and its finance arm to negative from stable, setting the stage for a downgrade of the world's biggest carmaker to junk status.
A downgrade to junk status would likely significantly raise GM's borrowing costs. GM and its finance arm had about $300 billion in debt at the end of last year.
S&P said it views the rating as "tenuous" and could cut it at any time if it looked like GM was not on a trajectory to improve its financial performance in 2006 and beyond.
Moody's Investors Service put its ratings for GM and GMAC on review for a possible downgrade after the automaker made its announcement.
GM's long-term credit is rated Baa2 by Moody's, two steps above junk status. GMAC's long-term credit is rated at Baa1, three steps above junk.
Fitch Ratings, which has GM's debt rated 3 notches above junk, is likely to reconsider their ratings as well, analysts said. Fitch rates GM and GMAC as a triple-B with a negative outlook.
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contributed to this report.