GM’s Loss Subsides

General Motors (hereafter, GM) -- presently, Motors Liquidation Company (MTLQQ - Analyst Report) -- posted a narrower loss in the third quarter (Jul 10 - Sep 30) compared with the results depicted by "Old GM" in the first quarter, before the company was transformed by a stay in Chapter 11.

GM, which began operations as a new company on July 10, 2009, has revealed a net loss of $1.2 billion for the quarter, significantly less than $6 billion it lost in the first quarter. The company’s earnings before interest and taxes (EBIT) before special items for the period were negative at $261 million. GM’s North American market showed a loss of $651 million while GM International Operations recorded a profit of $238 million.

The improvement was attributed to incentive programs including "Cash for Clunkers" and stability in the international market, especially China, Brazil, India and Russia (BRIC). In particular, the China market has been a significant contributor to the company’s results by maintaining a leading market share position.

GM and its joint venture partners in China continue to see an upward trend. They sold more than 478,000 vehicles in the quarter, up from approximately 364,000 and 451,000 units in the first and second quarters, respectively.

The company generated revenue of $28 billion -- up from the revenue recognized by "Old GM" in the prior quarter by $4.9 billion. The improvement in revenue was mainly caused by the Clunkers program and a higher global seasonally adjusted annual rate (SAAR) of 67.8 million units compared to 62.7 million units in the previous quarter, besides GM’s stabilizing global share.

GM’s global share went up 0.3 percentage points to 11.9% in the quarter from the first half of the year. The U.S. market share was flat at 19.5% compared to the first half of the year. In BRIC, the company had 13% of the combined market share, up 0.2 percentage points from the prior quarter.               

GM’s dealer inventories decreased 158,000 units to 424,000 vehicles in the U.S. at the end of reported quarter from the end of the prior quarter. Some of the brands that delivered strong retail performance in the U.S. include Chevrolet Camaro and GMC Terrain Chevrolet Equinox, Buick LaCrosse and Cadillac SRX. In the international market, brands that gained attention are Holden, Chevrolet Cruze, Daewoo Matiz Creative, Opel Astra and Chevrolet Agile.

GM’s structural cost has been significantly reduced by restructuring including salaried and hourly headcount reductions, engineering savings and volume related savings. In the first nine months of the year, structural cost declined by $6.7 million to $31.1 million compared to the year-ago period.

Financial Position and Loan Repayment

GM had positive operating cash flow, before special items, of $3.3 billion in the quarter. This reflected a favorable working capital impact from production start-up, timing of supplier payments and lower capital spending. As of Sep 30, 2009, cash and marketable securities grossed $42.6 billion.

GM has announced its plan to accelerate repayment of its outstanding $6.7 billion (13% of the $52 billion that U.S. taxpayers have invested in the company, mainly for a 61% ownership stake) in U.S. Treasury (UST) loans as well as the C$1.5 billion ($1.4 billion) in Export Development Canada (EDC) loans, ahead of the scheduled maturity date of July 2015. Improving global economic situation, stabilizing industry sales and healthier cash position are the underlying factors behind GM’s decision.

GM plans to repay the loans in quarterly installments from escrowed funds, beginning next month with an initial $1.2 billion payment to be made in December ($1 billion to the UST and $192 million to the EDC), followed by quarterly payments. Any escrowed funds available as of Jun 30, 2010, would be used to repay the UST and EDC loans unless the escrowed funds were extended one year by the UST. Any balance of funds would be released to the company after the repayment of the UST and EDC loans.

In addition, GM has begun to repay the German government loans that had been extended to support Opel. As of Sep 30, 2009, the company had a balance of €900 million ($1.3 billion), of which €500 million ($700 million) has been repaid in November. The outstanding amount of €400 million ($600 million) will be repaid at the end of the month.

Road Ahead

For the fourth quarter, GM has projected the industry SAAR volume in the U.S. to be 10.7 million units in the upcoming quarter, down from 11.7 million units in the reported quarter. Globally, the estimated figure is 65.4 million units. For 2010, GM has forecasted total industry volumes to be 62 - 65 million units globally and 11 - 12 million units in the U.S.

GM expects to have negative net cash flows in the fourth quarter due to several factors including cash outflows related to the Delphi settlement and payments for U.S., Canada, Ontario and German government loans. Consequently, cash balances at the end of the year are expected to be materially lower than third quarter levels of $42.6 billion.

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