GM forced to take a massive $39 billion charge
DETROIT — General Motors announced late Tuesday that it is taking a $39
billion charge in its third-quarter earnings to stay in compliance with
accounting laws that say a company can't keep booking tax credits if it
doesn't have a track record of making money.
GM (GM) was already expected to post a weak third quarter this morning.
The massive charge, its largest one-time charge ever, will force the
quarter deeper into the red.
GM stressed in its announcement that the charge doesn't affect its cash
or its ability to operate.
Chief Financial Officer Fritz Henderson said in the statement that GM's
long-term outlook remains the same. "GM continues to believe that its
new product introductions, combined with the new GM-UAW labor agreement,
once fully implemented, will significantly improve GM's competitive
position in the U.S.," he said.
If a company loses money, it can get a credit on its taxes that it's
allowed to take at a later date. It's called a "deferred tax asset" or a
"loss carry forward." But accounting rules say a company can only keep
those credits on the books if it can show proof that it will make money
Even though GM has posted some positive quarters in the past year, all
together its performance from the last 12 quarters adds up to a loss.
Julie Gibson, a GM spokeswoman, says the automaker has won back tax
credits like these in other countries, such as Brazil.
In March, GM warned that it could lose this tax benefit if it continued
failing to make money. At that time, it said the charge would be $34.8
billion, and the company considered it "more likely than not that we
will have U.S. taxable income in the future," that would allow it to
take the credits.
Since then, the automotive markets in the USA — its most important
market — and Germany have weakened considerably, and will continue to be
challenging in the near term, GM said.
Also, GMAC, the usually healthy financing arm, has taken a hit. Its
Residential Capital mortgage business posted a $1.8 billion loss for the
third quarter, caught in the subprime mortgage meltdown.
GMAC has traditionally been a strong part of GM's business, often
earning more than car sales.
GM now owns just 49% of GMAC. The automaker sold a majority stake to
Cerberus Capital Management and other private-equity firms in November
2006, before weakness in the mortgage industry became widely known.
GM made the announcement after the market closed. In after-hours
trading, its shares, which had closed at $36.16 Tuesday, were down