New General Motors Financial Performance Shrouded in a Fog of Number Manipulation

By: Richard H. Frank

If you read all the reports on how well the New General Motors is performing (losing Less money) most observers are encouraged by the steps being taken to reduce operating costs for the company in order to return to profitability. The company lost $4.3 B on $5.9 B in sales the first 6 months of operation. The corporation also reported it held $22.8 B in cash reserves as of December 31, 2009. The Government infused $50 B into the New General Motors in July of 2009 in exchange for a 65% ownership with shares as security for the investment. Those shares are not presently being traded publicly and will not be offered until when or if the comany returns to profitability. Under the “fresh start” accounting principles used by the new company it would appear that the company still owes the United States $4.7 B in additional loans over and above the original $50 B cash infusion which allowed the company to emerge from bankruptcy on July 10, 2009. The question that remains is what is the real value of shares held by the government? Up until now the government has been acting as the financial institution infusing cash into the corporation to keep it afloat. Previous forecasts show the New General Motors will once again be out of cash in June of 2010.

The current losses are attributed to $3.9 Billion in settlement with the United Automobile Workers union for retiree health care liabilities and foreign currency exchange losses. The company is now being faced with an additional suit for $450 Million associated with assumption of UAW contracts for Delphi retiree health care benefits. Additionally, contract negotiations with the Delphi operations remaining as part of the New GM are not going well and have been rejected by the rank and file.

So no matter how the accountants report the numbers, in order to perfume the pig, the New General Motors appears to be a long way from reaching a break even performance level and stopping the cash drain on the $22.8 Billion reserve. I congratulate management on their efforts to reduce operating costs, but also realize that with the depressed economic situation being experienced in America today, increased sales and revenues are still needed to reach that elusive break even point for General Motors. The question that must be answered without a dramatic economic recovery is how long will the government continue to infuse cash to keep the company afloat? Commercial lending institutions and bond holders cannot and will not support a company that continues to  burns through cash indefinitely.

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