Post-Bankruptcy GM Loses US$1.2 bil. in Q3

General Motors (GM) has released a limited third-quarter 2009 earnings statement, offering a first peek into the financial status of the new company that emerged from bankruptcy a few short months ago. As it is a privately held company, it is not required to conform to the Generally Accepted Accounting Principles (GAAP) that the U.S. Securities and Exchange Commission (SEC) demands of publicly held companies. However, since the company is majority owned by the U.S. government, public accountability demands that the company present some sort of financial update as it moves along its path to recovery. Nevertheless, it is simply not possible to make a direct comparison with the year-ago period as the old General Motors was a very different company, and is technically now still in bankruptcy court as Motors Liquidation Company. As a result, the new GM has released limited information regarding its financial health on a "managerial reporting" basis.

The company announced that it posted a US$1.15-billion net loss on revenues of US$28.0 billion during the third quarter, or more precisely in the period from 10 July (its exit from bankruptcy) through to the end of September. This was a US$4.9-billion improvement in revenues from the second quarter, which the company attributed to rising global sales rates and a stabilisation of its market share. On an earnings before interest and taxes (EBIT) basis, the company lost US$261 million during the period, posting a US$651-million loss in North America, while its GM International Operations (as the company's non-North American business is now known) eked out a US$238-million profit. Although year-on-year (y/y) comparisons are not technically accurate, this US$1.15-billion net loss is a significant improvement from last year's third-quarter US$2.5-billion net loss. "We have significantly more work to do, but today's results provide evidence of the solid foundation we're building for the new GM", chief executive officer (CEO) Fritz Henderson said in a statement.

Going forward, GM warned of a difficult financial fourth quarter. The company plans to pay out US$2.8 billion for the Delphi bankruptcy and US$2 billion for "payment term adjustments", and also plans to start repaying the U.S. and Canadian governments early on the loans that it has accepted from those institutions. The United States, Canada, and Germany will receive a combined US$2.5 billion, while the company will pay out another US$1 billion in internal restructuring costs. Given all of this spending in the fourth quarter, the company will be reporting cash levels that it says will be "materially lower than third-quarter levels of US$42.6 billion". The company recorded a positive US$3.3-billion cash flow for the third quarter, a performance that will almost certainly not be repeated in the fourth quarter, according to GM.

Outlook and Implications

GM's third-quarter performance was at the same time encouraging yet slightly disappointing. On a positive note, the company has come out of bankruptcy with a far healthier balance sheet than the one it had when it entered Chapter 11. Structural costs have been slashed considerably, thanks to dramatic headcount reductions and a restructuring of the company's bureaucracy. The "old GM" had a pre-bankruptcy structural cost of US$37.8 billion from 1 January to 30 September 2008; that was reduced to US$22.0 billion for the period 1 January to 9 July 2009, and since then has fallen to US$9.1 billion during the third quarter (beginning from 10 July). That is a significant reduction that will definitely help the health of the company's balance sheet. The company has also eliminated significant amounts of debt—"old GM" was saddled with as much as US$94 billion of debt just before it emerged from bankruptcy on 10 July. That has since been slashed to a far more manageable US$17 billion as of 30 September, including US$6.7 billion in U.S. Treasury loans, US$1.4 billion in Canadian loans, and US$1.3 billion from the German government. This does not include the company's eventual obligations to the United Auto Workers (UAW) union's Voluntary Employee Beneficiary Association (VEBA) healthcare trust fund, which will total roughly US$12.2 billion when they fall due some time in 2010. GM has decided to start repaying these government loans as quickly as possible, not only for public relations (PR) reasons, but also to extract itself from the U.S. Treasury's various restrictions on companies that have accepted Troubled Asset Relief Program (TARP) loan money (such as salary caps for new executive hires).

However, as encouraging as the results of bankruptcy have been for the company's balance sheet, there is some disappointment in the third-quarter figures. To be fair, the period was anything but a typical quarter for the U.S. market as sales were affected heavily by the government's "cash for clunkers" programme, which allowed the total vehicle sales rate to rise to 11.7 million units. GM was apparently only minimally affected by this as it was already trying to restart production that had been halted for its bankruptcy and the traditional summer shutdown, and it ran out of key models for the programme. Far more damaging was the September sales hangover that saw the market fall dramatically. Combined with the company's error in deciding not to participate in the typical September "truck month" incentive spending in North America, the overall net effect was that GM posted another loss in North America whereas its competitors (such as Ford) turned in a surprise profit for the quarter. Even Chrysler stated at the unveiling of its business plan that it is financially much more stable than people realise thanks to its bankruptcy (this is perhaps not a fair comparison, however, given that GM is a far bigger company with many more obligations to work through, such as dealer closure costs, Delphi settlements, and more).