GM Post Bankruptcy 3rd Quarter 2009 Financial Results

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Tag: GM, General Motors, 3rd, third, quarter, financial results, post bankruptcy, Chapter 11, managerial accounting, IPO, Initial Public Offering, Opel, Saab.

November 25, 2009

On Monday November 16, GM reported it first financial results since emerging from bankruptcy in early July.  The new company presented a non-GAAP managerial accounting results for 3rd Quarter as it is in the process of applying “fresh start” accounting.  GM stated the new entity’s audited results that comply with GAAP will be submitted to the SEC in its 10-k in 2010.  As a private company, GM is no longer obligated to report to the government but in preparation for a Initial Public Offering the company is maintaining full disclosure and transparency.

The non-GAAP 3rd Quarter results provided sound insight into the state of post-bankruptcy GM.  Managerial accounting is sufficient and preferred in establishing the operating performance of the company.  After a careful review of New GM’s financial performance the company appears to be performing better than expected.

GM reported a headline loss of $1.2 billion from July 10 through September 30, 2009.  The period reflects the company’s performance post bankruptcy and most of the 3rd Quarter (Figure 1).  Just focusing in on the new company, GM North America (GMNA) lost $651 million.  That is a substantial improvement from the almost $8 billion the business unit lost in the first half of 2009.  GM’s International Operations (GMIO) earned $238 million in the 3rd quarter compared to a cumulative loss of $2.4 billion from January through June.  Unlike in prior reporting periods GM consolidated results for all business outside of GMNA.  It must be assumed than that Opel is still a drain on the organization, however China and Brazil drove profits as they have done in the past.  Overall GM lost only $300 million before interest, taxes and other special items.

Figure 1: New GM Q3 2009 Preliminary Managerial Results (click to enlarge)

Total revenue for both Old and New GM was $28 billion, up from $23.1 and $22.4 billion in the 2nd and 1st Quarter respectively (Figure 2).  New GM’s share of 3rd Quarter revenue was $26.5 billion.  Revenue improvements was lead by GMNA as production resumed as the company release new product and refilled depleted inventory after cutting production by 50% this year.

Figure 2: Global Sales Results (click to enlarge)

As Figure 3 shows, a major portion of the quarter loss was attributed to one-time charges.  Since emerging from bankruptcy until the end of the quarter, GM booked $505 million in losses attributed to Delphi, dealer closings and personnel buyouts.  Compared to results in the first half, the improvements are significant.

 

 

Figure 3: New GM Q3 2009 Preliminary Special Items (click to enlarge)

Since emerging from bankruptcy the company’s unrestricted cash position improved from $19.1 billion to $25.2 billion at the end of the 3rd Quarter.   The company also posted a $3.3 billion improvement in operating cash flow before special items (Figure 4).  It should be noted this was helped by new product launches and increased production after production cuts during its stay in bankruptcy.  The new company’s receivables were $8.2 billion.  With the lag time to pay suppliers for parts this should change in the 4th Quarter.  The cost to the company associated with the continued restructuring and Delphi accounted for $1.1 billion.  

Figure 4: Managerial Cash Flow Summary (click to enlarge)

The company warned that in the 4th Quarter it will burn through a significant amount of cash as it begins to repay its debt to the US, German and Canadian governments, resolves the situation with Delphi and continues to restructure.  Much of the cash burn has been anticipated and will not hurt its operations.  A $17.4 billion escrow account was established as part of the bankruptcy process as a contingency in case the economy continued to decline and GM’s performance lagged.

Most impressive, the company reported for the first time since 2003 positive liquidity.  Figure 5 illustrates the impressive redirection of its balance sheet post bankruptcy.  Furthermore, GM has the necessary cash on hand and cushion to complete its restructuring. (GM Liquidity Pre-Bankruptcy).

Figure 5: Liquidity (click to enlarge)

Post-bankruptcy GM also reported significant improvements in reducing its structural costs.  High level estimates have identified the company reduced costs from a $12.5 billion cost per quarter in 2008, a pre-bankruptcy 2009 rate of $11 billion to a post-bankruptcy quarterly rate of $10 billion.

Revenue has improved over the previous quarter as the company has launched a string of new product.  GM presented the market performance of it latest launches.  Consistent with products released before the economic crisis, GM has dramatically improved the “retail” transaction price of its new vehicles compared with the models they replaced (Figure 6).  This is a good indication of the market’s acceptance of the products and illustrates the continued improvements the company has made at designing vehicles to hit the heart of the market.  For the reasons explained the company is less dependent on incentives and fleet sales to move product.  In the 3rd Quarter, the company reduced it average retail incentive to $3,561 from a high of $5,433 during the 4th Quarter last year.  Retail revenue per vehicle should not be confused with previous publish information because it includes fleet sales (Historic Revenue per Vehicle).  One concern is the company is still dependent on higher priced vehicles to generate revenue which needs to be balanced with more small car sales in the US.  The company is very much suseptible to another downturn in the economy and/or escalating fuel prices at this at this time.  However, it is understood new small cars are scheduled to be launched in the next couple years starting with the new Chevy small cars in less than a year.

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Figure 6: New Product Performance (click to enlarge)

Conclusion

New GM’s financial results are very encouraging.  Moreover, the company anticipates its market share will improve in November which will mark the 4th month in a row of market share gains.  If realized, the results are impressive as GM unwinds four brands.  Saturn, Pontiac, Hummer and Saab, will be phased out or sold, only accounted for 9% of GM’s sales in October compared to 15% in 2008. (AN retail)

GM sales in China continue to be strong as sales are up over 50% for the year.  The company expects continued but slower growth in China next year as government supported incentives and tax cuts on small cars expire.

The positive cash flow results are the most encouraging line item in the report.  The results are consistent with what Ford reported for the same period.  Although there are caveats related to the timing of paying suppliers after resuming production, it illustrates the company has made great strides in reconciling its cost structure to the current economic climate while in bankruptcy.  The company will burn through a lot of cash next quarter, but assuming the economy holds, the worst should be behind them.  Furthermore, the annoucement that GM will begin to payback the US government is another encouraging sign in the new business model. Beyond special items, GM's operational preformance should continue to strength even if the overall economy remains weak. The first half of next year will be the real test for the company's long term outlook.

Of concern is, the company did not provide financial details on their international operationst.  In the past GM’s report included more resolution on Europe, Latin America and Asia-Pacific operations.  Once GM has concluded its “fresh start” accounting it is hoped GM will de-aggregate the accounting for its international operations  – especially now that the company intends to keep Opel as a whole owned subsidiary.  Breaking out GM Europe and Opel will help track of the progress on that restructuring.

As part of its restructuring, GM placed its European luxury brand Saab up for sale.  It had reached an agreement to sell Saab to the sports car maker Koenigsegg. It was just been reported that Koenigsegg has backed out of the deal with GM.   China's Beijing Automotive Industry Holding was to take a minority stake in Koenigsegg and help fund the deal.  Ideally GM could quickly find another buyer for Saab or its assets.  The brand is on the cusp of launching a replacement for the 9-5 and the new 9-4x crossover.  GM's board is scheduled next week to meet and will discuss the issue.  It is uncertain at this time, if the brand could be used as a bargaining chip and fully integrate Saab manufacturing with Opel and close down production in Sweden or just close down the brand if a buyer cannot be found.

   

References:

GM Q3 2009 Chart Set

GM Q3 2009 Press Release

GM Q3 2009 Supplemental Material

GM expects China sales growth to slow in 2010, Automotive New, November 2009

GM says U.S. share may rise for 4th straight month, Automotive New, November 2009

Koenigsegg drops plans to buy GM's Saab, Automotive News, November 2009

Beijing Auto aims to close Saab deal by year-end, Automotive News, November 2009  




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