GM Posts US$1.33-Bil. Q2 Profit, Announces CEO's Departure

General Motors (GM) posted its second-quarter 2010 earnings results yesterday morning, turning in a sizeable US$1.3-billion net profit for the period from April to July 2010 on revenues of US$33.2 billion globally. This compares very favourably with the US$12.9-billion loss recorded in the second quarter of 2009, but comparisons with the year-ago period are difficult because of GM's bankruptcy, which has left it a fundamentally different company both financially and legally. For the year-to-date, GM has posted a net profit of US$2.2 billion on total revenues of US$64.7 billion worldwide. Its operating results in the second quarter of 2010 were also quite positive and an improvement on the first quarter, earning US$1.8 billion in operating income, compared with a US$1.2-billion gain in the previous quarter (by contrast, GM lost US$9.4 billion in the second quarter of 2009). Cash flow also improved, with GM reporting a positive US$2.8-billion free cash flow, an improvement on last quarter's US$1.0-billion cash gain. "I am pleased with our progress on achieving our business objectives," said Chris Liddell, vice-chairman and chief financial officer, in a statement released by the company. "We have delivered strong product, maintained cost discipline, progressed strategic initiatives such as restructuring Europe and acquiring AmeriCredit, and delivered two consecutive quarters of profitability and positive cash flow."

On a regional basis, GM's results were mixed in the first quarter. The strongest performances came in its GM North America (GMNA) and GM International Operations (GMIO) divisions. GMNA did especially well thanks to much better sales, with the company posting a US$1.6-billion operating profit for GMNA for the quarter, and US$2.8 billion for the half. GMIO saw its profits shrink for the quarter however, coming in with earnings of US$672 million, down from US$1.2 billion seen in the first quarter; for the first half, GMIO has contributed US$1.8 billion to the bottom line. GM Europe posted a loss of US$160 million for the second quarter, an improvement over the US$477-million loss in the first quarter, which was itself an improvement of US$300 million from the quarter before that. These are only the second set of financial results that GM has posted since emerging from bankruptcy at this time last year, but reports have indicated that the company feels they are good enough to move ahead with an initial public offering (IPO) of common stock, the filing for which will likely be announced today. But complicating that IPO may be the bombshell announcement by CEO Ed Whitacre that he is stepping down at the end of the month as CEO, and eventually as Chairman as well. Whitacre will be replaced by Dan Akerson, a current member of the GM board of directors, and managing director of the private equity firm Carlyle Group. Akerson is another outsider to the auto industry, having been appointed to the GM board last year after the company exited bankruptcy. He has top management experience mostly in the telecoms industry, having run XO Communications and serving as Chairman of Nextel. Whitacre steps down after just 10 months on the job in a move that was expected in terms of its inevitability, if not its immediacy. "We are on the right track," Whitacre wrote in a statement announcing the executive change. "Dan is committed to GM; he's been a key player in the decisions our board has made over the last year. He will do a great job and deserves your complete support. I have been preparing for this day ever since I came to General Motors. It was never the plan for me to be the long-term CEO and chairman, which the Board knew and understood," Whitacre continued. "But that doesn't make today any easier for me."

Outlook and Implications

The news of GM's second consecutive quarter of profitability, and improving profitability at that, has been completely overshadowed by the stunning announcement from the company's Chairman and CEO that he is retiring from GM after just 10 months. While Whitacre was never expected to be a long-term executive, announcing his departure just days before launching an IPO seems an extremely confusing strategy. The new CEO, Dan Akerson, was not prepared to discuss his vision for the company or anything regarding strategy or planning in the conference call that announced his appointment, which also did not sit well with many who hoped that something would be said that could engender confidence in the company's long-term plans. This is the fourth CEO to take the position in 14 months, and underscores GM's biggest problem right now. It is not product, or finances, or market share, labour costs, healthcare expenses, or capacity utilisation—GM's biggest challenge is leadership stability. GM has a fantastic business plan, products that are keeping its factories humming at capacity or more, labour contracts that are set until 2015, and a structure that is allowing it to turn sizeable (if not quite massive) profits at an industry market sales rate that is by historical terms, awful. In other words, the business seems to be on the right path. But a lack of stable leadership has affected morale to the point where many continue to be very nervous about their career longevity at the company. Each new CEO has brought about a major executive shuffle and divisional shake-up, and there is no reason to think that Akerson will not do the same. The fact that Akerson is an outsider to the auto industry is less of an issue than it would have been in the past; it has been established that executives can indeed learn the auto industry well enough to make a go of it, if they have an open mind about it and a manufacturing background. Ford's Alan Mulally is usually held up as the epitome of such success, but even Ed Whitacre must be credited for the work he accomplished in shaking up GM's staid corporate culture as much as he has. But going into an IPO situation, in which the big questions will be revolving around what the future holds for GM, and asking institutions and investors to invest billions of dollars in the company with a new CEO who is an as-yet-unknown quantity is a case of phenomenally bad timing. While Akerson may be a decent choice to lead GM during this period, given that a finance man with turnaround credentials may be a more attractive lure for less-certain Wall Street investors than a GM automotive industry insider would be, one has to believe that the timing for such a move could have been handled better.

In terms of GM's quarterly performance, the company is proving that the restructuring funded by the U.S. and Canadian taxpayers has indeed paid off. Despite Whitacre's contention that his work at the company is finished and that GM is now solidly on track as a new company, there still remains a lot of uncertainty over whether or not GM is truly out of the woods. Much of that uncertainty has to do with the overall global economy and North America in particular; while GM is posting strong numbers, the U.S. economy is not, and that could affect the company's profitability for the rest of the year. GM seems unconcerned however, pushing ahead with the IPO in order to try and boot the government from the boardroom as quickly as possible, which is in itself not a bad idea. Whereas the government was previously GM's biggest help to get through bankruptcy and restructuring, it now stands to be GM's biggest hindrance in terms of true capitalist growth, as it has become a symbol for various political movements unfriendly towards the current administration. While the decision to replace Whitacre (and in truth, most of GM's corporate decisions) are not politically motivated, many of the things GM does become politically charged, meaning the sooner the government involvement in the company is ended, the better for all parties involved. Generating profits and launching an IPO sooner rather than later are good steps towards that goal.