GM Will Restate
Results for 2001
In Latest Stumble
Auto Maker Says It Booked
'Erroneous' Supplier Credits;
Stock Price Hits 13-Year Low
By JOSEPH B. WHITE and LEE HAWKINS JR.
Staff Reporters of THE WALL STREET JOURNAL
November 10, 2005
DETROIT -- General Motors Corp., whose accounting has been under scrutiny by the Securities and Exchange Commission, said it must restate financial results for 2001 and possibly subsequent years in the latest blow to the beleaguered auto giant and its embattled chairman and chief executive, Rick Wagoner.
Late yesterday, after the close of New York Stock Exchange trading, GM said it overstated income for 2001 by as much as $300 million to $400 million -- equivalent to about 50% of the profit it reported at the time -- by "erroneously" booking credits from suppliers. The company said its accounting for credits from suppliers is "one of the matters" being investigated by the SEC.
GM's admission ended a day in which its shares were battered, falling to their lowest level since November 1992 -- during the company's last financial and management crisis -- in 4 p.m. Big Board trading, closing down $1.23, or nearly 5%, at $24.63. Also yesterday, Fitch Ratings cut its already junk-level rating on GM's debt by another two notches.
GM spokeswoman Toni Simonetti said GM's audit committee had met earlier this week to discuss the accounting issue.
"The issue here was that we basically booked the income in the wrong period. We're going to restate it rather than taking it all in 2001," Ms. Simonetti said. "That income still exists. It's not like that income shouldn't have been booked, it just shouldn't have been booked in all of 2001."
Still, the disclosure that GM materially overstated 2001 income from continuing operations -- and may have to make what it said would likely be "immaterial" adjustments to earnings reported for subsequent years -- will likely add pressure on Mr. Wagoner. He has been battling to turn around losses that have totaled $3 billion for the company so far this year.
Mr. Wagoner, who was CEO in 2001, has spent his five years at the company's helm trying to expand its global footprint while propping up North American sales to generate revenue to cover burgeoning U.S. health-care and pension costs. But this year, intensified competition coupled with rising gas prices, which have dented demand for GM's most profitable models, have undermined Mr. Wagoner's strategy for keeping GM in the black.
The company's falling share price -- GM shares are down 39% this year -- and the downgrading of its debt to junk status by all the major credit-rating agencies symbolize the declining confidence in Mr. Wagoner, who became GM's chief financial officer in 1992 in a boardroom coup that swept out top management.
Until now, GM has largely been untroubled by concerns about accounting improprieties that have tripped up some big U.S. companies in recent years. Neither GM nor Mr. Wagoner nor any GM officer has been accused by the SEC of any wrongdoing.
In April, GM Chief Financial Officer John Devine, responding to questions raised in the media about transactions between GM and its former parts unit Delphi Corp., assured investors in April that GM's accounting for its transactions were "very appropriate" and "pretty simple from our standpoint." Mr. Devine was chief financial officer in 2001; Delphi recently entered Chapter 11 bankruptcy.
GM didn't specify yesterday whether its 2001 restatement plans involved Delphi transactions. GM has recently disclosed that the SEC is investigating issues involving its accounting, including the company's handling of assumptions used to determine certain pension costs.
GM had reported in its 2001 annual report to the SEC that it earned $601 million in net income and income from continuing operations for 2001, down from $4.45 billion in 2000. GM subsequently revised that to reclassify its former Hughes Electronics unit as a discontinued operation. That boosted 2001 income from continuing operations to $1.2 billion.
GM said it expects to complete the review of the situation and "take any appropriate action to correct previously reported financial statements" before it files its annual report for 2005. The company said its board's audit committee concluded on Tuesday that "due to the likelihood of a material restatement of GM's financial statements with respect to 2001, investors should no longer rely on GM's previously filed financial statements for that year," or the accompanying audit reports.
The practice of suppliers making payments to customers, effectively rebating projected cost savings up front, is a touchy one in the auto industry. Delphi, spun off from GM in 1999, has previously acknowledged that it improperly accounted for such payments it received from some of its suppliers.
In a separate accounting matter, GM disclosed yesterday that it has "evaluated the effectiveness of GM's disclosure controls and procedures" related to assessing whether or when certain assets should be reclassified as impaired and written off according to accounting rules. GM said that Mr. Wagoner and Mr. Devine determined that as of Sept. 30, the company's controls were not effective at the "reasonable assurance level" as defined by certain SEC guidelines. GM said the situation "resulted in the failure to timely reduce the carrying value of GM's investment in the common stock of Fuji Heavy Industries to fair value."
GM disclosed previously that it would sell its stake in Fuji, maker of Subaru cars, at a substantial loss. GM said its management has now implemented "additional review procedures" to identify when it should reclassify foreign investments. GM said it is "confident" that it now "has substantially completed the process of fully remediating its related controls and procedures."
The company also said that in July it implemented a new ledger system for the North American and insurance operations of its General Motors Acceptance Corp. auto-financing division, which also sells mortgages and insurance.
Mr. Wagoner has been pushing lately to reverse the company's slide by seeking deeper benefit and cost cuts. In a recent interview, Mr. Wagoner wouldn't say when GM can expect to return to profitability, but he promised more actions to cut costs.
GM already has signaled it will announce more plant shutdowns soon. The company last month reached agreement with the United Auto Workers to cut health-care cash outlays by as much as $1 billion a year, although GM has agreed to put the cash it saves in 2005 and 2006 into a trust that will help offset higher costs for GM retirees.
Mr. Wagoner has been battling to stop GM's two decades of decline ever since he took over as CEO in 2000. Within six months, amid a sluggish economy and sliding sales, he announced a wide-ranging cost cutting plan that included the shutdown of GM's 103-year-old Oldsmobile division, 15,000 job cuts and factory shutdowns in Europe.
But Mr. Wagoner took a bold gamble after the terrorist attacks of Sept. 11, 2001, declaring that GM would offer 0% interest loans for five years on virtually all its models. Under the patriotic banner, "Keep America Rolling," GM's call to shoppers helped jump-start the U.S. economy and avert a potentially deeper downturn than ultimately occurred.
But while the campaign boosted GM's sales and its public image, it came at a substantial price. The big discounts ate in to GM's profit margins and helped to sharply depress its 2001 profits. Mr. Wagoner rebuffed critics by saying that while aggressive discounting, symbolized by the 0% interest deals, was costly, allowing sales and market share to decline would be costlier still, given GM's huge and largely fixed burden for U.S. hourly workers and retirees. Under GM's labor agreement with the UAW, GM factory workers get paid up to 95% of their base salary even when laid off.
In one widely quoted speech, Mr. Wagoner told his rivals to "quit whining" about the rising costs of discounts, known in the auto industry as "incentives." More recently, in September, Mr. Wagoner said during a discussion with reporters at the Frankfurt Motor Show, that it's "simplistic" to think that GM, with its legacy cost burden, can recover profitability simply by cutting capacity or cutting brands. "Our retiree base isn't shrinking," he said.
GM's health-care costs, currently estimated at $5.6 billion a year, aren't shrinking either. Yesterday, in a filing with the SEC, GM provided more detail about its annual and future health-care obligations. The company already has withdrawn about $2 billion this year from a fund earmarked for paying employee health benefits to cover ongoing health-care costs, and said it is "evaluating the need for additional withdrawals as the cost of health care continues to adversely affect GM's liquidity."
http://online.wsj.com/article_print/SB113158081329892910.html
GM is toast. this will seriously hurt our economy when they go under.
--------------------
America's debt problem is a "sign of leadership failure"
We have "reckless fiscal policies"
America has a debt problem and a failure of leadership.
Americans deserve better
Barack Obama
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