GM debt rating lowered as profit falls below expectations

N. American unit has loss

big layoff in Europe is set


DETROIT - Sapped by everything from surging domestic health care costs to a hemorrhaging European operation, General Motors Corp. reported third-quarter earnings yesterday that were well below Wall Street's expectations, including a loss in North American automotive operations for only the second time in the past decade.

After the earnings announcement, Standard & Poor's cut GM's debt rating to its lowest investment-grade rating. Fitch Inc. cut GM's debt rating Wednesday.

The company's stock tumbled $2.46, or nearly 6 percent, to close at $38.84 yesterday.

The world's largest automaker also was hurt by a cooling market in China and rising incentive costs in the United States, as well as weakening demand for the largest sport utility vehicles.

The company reduced its full-year profit forecast to a range of $6 to $6.50 per share, down from its previous forecast of $7 per share. To begin to address its troubled European operation, GM laid out a restructuring plan that included a reduction of its payroll by 12,000 workers, or about a fifth of its European work force.

"This is obviously a disappointing quarter," G. Richard Wagoner, GM's chairman and chief executive, said in a conference call, adding that the loss in the company's North American automotive operations was the first since 1995 other than a loss caused by a labor strike in 1998.

"We've got to move faster in addressing some tough cost challenges like health care in the United States and our overcapacity and high cost footprint in Europe," he said in a separate statement.

GM reported a net profit of $440 million, or 78 cents a share, compared with net earnings of $425 million, or 79 cents per share, in the third quarter last year when the company had fewer shares outstanding.

The earnings came in well below the average of 96 cents per share expected by analysts, according to Thomson Financial, and at the low end of GM's own expectations for the quarter.

Financial analysts also noted that earnings were propped up by $250 million, or 44 cents a share, because GM is reducing its product liability reserves based on an internal review of its methodology, making the company's operating results look weaker.

Darren Kimball, an analyst at Lehman Brothers, said in a note to investors that earnings without the decreased reserves would be only 34 cents a share, "a very sizable disappointment."

In the United States, the company relied on a huge incentive push - including zero percent financing for some six-year loans - to clear out a bloated inventory of 2004 models. While those incentives are good for car shoppers, they erode profitability.

Sales of big sport utility vehicles, a major profit center for GM, are also slowing as high gas prices give some consumers pause. Standard & Poor's blamed the slower sales and several other factors for its downgrade of the company's debt rating.

GM's North American automotive operations reported a $22 million loss in the quarter, down from a $128 million profit in the third quarter last year. In Europe, losses increased to $236 million from $152 million a year earlier. Earnings in Latin America increased to $27 million from a $104 million loss.

Earnings at GM's financing division, the General Motors Acceptance Corp., which has been the mainstay of the company's profits, rose to $656 million from $630 million.

Worldwide automotive operations reported a $130 million loss, compared with a $34 million profit a year earlier.

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