GM Reports Full Year 2008 Financial Results and Opel Restructuring

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February 28, 2009

General Motors on Thursday reported their long expected 4th Quarter and 2008 full-year financial results.  For the 4th Quarter, the company’s consolidated loss was $9.5 billion for a total of $30.8 billion in 2008.  Revenue in the last quarter dropped 34% to $30.8 billion and for the year fell 17% to $179.9 billion (Figure 1).

 Figure 1: 2008 Consolidated Financial Results Summary

The production cuts because of the poor economic climate in the last quarter drove down revenue.  Global production declined 12% for the year and 30% in the last quarter.  Much of that can be attributed to North America where production fell by just over 800,000 vehicles for the year.  However, production at GM Europe (GME) fell sharply in the 4th Quarter and was down over 50%.  For the year the company lost over a million units compared to 2007 (Figure 2).

 Figure 2: GM Global 2008 Production

Always telling is the cash flow situation and tells a truer picture of viability than the profit/loss results. The company burned through $5.2 billion in the last quarter and $19.2 billion for the year.  At the start of the year the company had almost $27 billion in cash and marketable securities.  At the end of the year the company had $14 billion, which includes $4 billion from the US Treasury and a line of credit tapped into in the fall.

All of GM’s regional operations were in the red for the 4th Quarter including its Latin American operation.  As fully expected, GM’s North America was the loss leader with the company reporting unadjusted pre-tax losses of $3.5 billion for the quarter.  GM Europe showed a sharp loss of $1.8 billion totaling $2.7 billion for the year. Latin America posted a $181 million quarter loss, however, it made $1.3 billion in 2008.  GM is continuing to sustain a loss from it 49% ownership of GMAC.  The red ink across all regions further illustrates the significance of the global downturn in auto sales (Figure 3).

 

Figure 3: Pretax P/L Statement by Regional Operations

GM’s also reported its pension fund which was fully funded by $20 billion at the end of 2007 is now short by $12 billion.  This is a sharp 4th Quarter turn-around as the plan was fully funded as of the 3rd Quarter last year.   The return on investment was a an estimated negative 11% (recent years ROI was about 10%), many employees took early retirement and GM took on obligations from its former parts supplier Delphi.  The company’s unfunded pension liability is now an additional burden on top of it health care obligations.  More so because the pension obligations were not part of the debt-for-equity requirements established with the US Treasury as part of the bailout loan agreement.   It should be noted that Ford also reported its pension fund is not fully funded as a result of deflation in the asset markets since the financial crisis escaladed in September 2007 (Figure 4).  GM also accounted for this in its viability plan to the Treasury and identified the liability as a cash flow need.

 Figure 4: Pension Fund Status

Last week GM said it would consider selling a portion or seek a partner for it German subsidiary Adam Opel AG to raise capital and also help the operation return to profitability.  Selling a portion of Opel may also play into the German state providing the company with financial aid to save jobs and factories.   Opel is still the regions third largest automaker and needs €3.3 billion to restructure.

A couple days ago Automotive News reported GM intends to separate its Opel subsidiary into a separate business unit and relinquish control of 25% to 50% of the company according to GM Europe President Carl-Peter Forster.  GM intents to retain control of the new business entity.  This restructuring aims to return Opel to profitability by 2011.

It was also reported, as part of the restructuring GM would transfer patent ownership from Opel’s engineering center in Ruesselsheim, Germany back to GM. It was estimated that Opel would have to pay a 5% licensing fee for each car sold to GM.  This would be consistent with royalties and licensing fees Chrysler LLC currently pays former parent Daimler on some of its product such as the rear-wheel drive LX cars that were adopted technology from Mercedes-Benz vehicles.

Earlier in the week there was analyst speculation of Daimler being a natural buyer for Opel as GM tries to unload the unit and the German state tries to preserve jobs.  On the release of the report, Daimler’s shares fell 5%.  Of course Daimler denied the possibility.  Furthermore, Automotive News also reported this week GM could make a decision in the coming weeks to sell its Opel plant in Eisenach, Germany, to Daimler.  Currently the plant makes the Corsa small car.

GM has their problem but as I have been pointing out for sometime, they are not alone.  In light of the speculation with regard to Daimler's involvement in Opel, the financial health of the company needs to be considered.  Daimler the maker of Mercedes-Benz and commercial truck vehicles, last week reported their full 2008 results and there was a surprise (Press release).  For a quick overview, Daimler’s net profit declined from 4.0 billion in 2007 to 1.4 billion in 2008.  Furthermore, free cash flow fell from a positive 7.6 in 2007 to a negative 3.9 last year.  The company also reported a net liquidity of 3.1 down from 12.9.  The surprise was the sharp drop in available group cash.  Readily available cash for the company was reported to be  7 billion and only €4.6 billion was assigned to the industrial business including it car and commercial truck operations (Figure 5). At the end of 2007, Daimler’s consolidated cash and cash equivalents stood at €15.6 billion.

 

 Figure 5: Daimler Liquidity Position

The Mercedes-Benz Car business group’s posted a 359 million loss in the 4th Quarter compared with a profit of 1.426 billion in 2007 (Figure 6 ).  Full year profits were down over 50% to 2,117 billion in 2008 compared with a profit of 4.753 billion posted last year.  Losses at Chrysler account for much of the €1.658 billion loss in the Van, Bus, Other Division.

Figure 6: Business Unit 4th Quarter Summary

Since 2007, Daimler has been active in a stock repurchase program.  The company’s initial program bought back and retired 6.2 billion worth of outstand shares.  Last August Daimler reauthorized another share buy back program, which was suspended in October.  During 2008, the company purchased just over 4 billion worth of stock which accounts for a significant portion of Daimler’s cash drain.

Analysis:

There really is not much to discuss in GM’s 2008 financial overview because of the pending approval of additional bailout loans from the US Treasury.  The expectations were the complete results including the 4th Quarter would be bad and GM did not disappoint.  Assuming the company receives the money and moves forward with its viability plan, the only pressing new issue is the unfounded pension liability.  In the last few months, the pension fund for lack of a better word lost $30 billion.  Other than that, at this time discussing the rest of the balance sheet is moot point because it is horrific.  However, the pension fund will be a serious issue going forward.   For me it is hard to fathom what has actually happened to the US auto manufacturers since I published my industry overview back in late June 2007 (See GM, Ford and Chrysler Near the Brink of Collapse?).  That was two solid months prior to the Lehman bankruptcy and the escalation of the financial bank crisis.

As for the prospects of GM recovery I continue to go through the viability plan submitted to the US Treasury.  Since I last wrote about the subject (See Analysis of GM and Chrysler's February 17th Restructuring Plans), one major issue that I did not address earlier was the lack of insight into the company’s revenue expectations.  The company presented their cash flow needs and estimates but did not outline clearly its revenue expectations.  As shown by the company’s 2008 results, the company lost $30 billion on about an equal amount of lost revenue.  

Some sort of major restructuring of Opel was anticipated because of the condition of the market and the fragile state of the business unit's finances.  The possibility of GM shedding its stake in Opel may be long over due.  For the better part of 10 years, GM has been struggling to restructure the operation with minium success.  For the better part of a decade the unit has not been profitable and divesting themselves of Opel is likely the best course of action given the more pressing problems in the US.  Opel’s European sales were down 11% in 2008, but down 24% in the 4th quarter of the year.  This accounts for the 50% reduction in production in the quarter.  However, the Korean sourced Chevrolet product saw sales improve 10% for the year in the region and were only down 4% in the last quarter.  Chevrolet was launched in Europe after GM purchased the bankrupt Daewoo's assets earlier this decade.  The brand has done well in Europe, especially Eastern Europe and now sells almost a half million vehicles (GM 2008 Global Sales).  A divestment of Opel should allow GM to free up resources and tightly focus on Chevrolet in Europe through its Korean subsidiary.  In any case, if GM structures a spin-off of a minority position in Opel but maintains control, to be granted financial assistance from the German government, the operational situation would be little different from other joint-ventures GM has with GM Daewoo or their Chinese operations.  If GM were to completely divest themselves of Opel, including SAAB which filed for bankruptcy last week, revenue would drop by about $30 billion.  Furthermore, GM just does not have the cash right now to restructure Opel yet again.

Europe is a highly competitive market with too many vehicle manufacturers and brands.  If the economic picture does not improve, I continue to believe the European manufacturers will have to consolidate or go out of business (Not likely given national identities are linked to auto companies and they employ a lot of people).  Like the US bailout of GM and Chrysler, governments will step in to provide funding and hence I can envision Daimler taking on Opel.  I am not advocating such a move as Opel independent of GM is a regional player much like Chrysler.  However, I am sure Daimler could be persuaded if asked by the government and loans were secured to support Opel and German jobs.   As for Daimler, they are not exactly healthy and liquidity in a downturn is key to survival after the ill conceived stock repurchase program (For the most part I am against such activities as it is a waste of cash and I was shocked to see their end-of-year cash position because of it).  I just would not be surprised if the German government insisted on consolidation of its industry.  The US government should also consider it.

Resources:

GM 2008 Financial Highlights (pdf)

GM 2008 Chart Set (pdf)

Daimler 2008 Fact Sheet (Excel)

Daimler 2008 Financial Presentation (pdf)

Additional Reading:

Toyota rents ship for unsold cars, UPI, February 25, 2009

Unsold Cars Around the World, www.ritholtz.com/blog/2009/02/unsold-cars-around-the-world/, February 28, 2009

 

 

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