'Huge cash burn' hits GM bottom line

Jamie LaReau, Automotive News

Detroit, Michigan - With all the loose talk on Wall Street about a possible General Motors bankruptcy, analysts paid as much attention last week to GM's cash reserves as they did to the company's $8550 million net loss for 2005.

Sure enough, GM burned through a boatload of cash, but it still has plenty on hand. As of 31 Dec., the automaker had $20 500 million in cash, down from $23 300 million a year earlier. GM also has access to more than $50 000 million in credit lines and other cash sources.

One might think that would be enough to stifle all those bankruptcy rumors, but Wall Street senses trouble. John Rogers, senior auto analyst at Citigroup in New York, says falling revenues produced "a huge cash burn."

In 2005, GM had a negative cash flow on operations of $5900 million, compared with a positive cash flow of $4200 million a year earlier. That's a stunning $10 100 million swing.

Cash flow is important because it demonstrates a company's ability to pay its day-to-day bills, invest in new products and keep the business solvent. And it's especially important for the auto industry because a sales downturn can consume cash quickly.

"It's a good barometer of how their operations deteriorated in 2005," Rogers says.

Crucial trucks

Rogers says the negative operating cash shows that GM sorely needs additional revenue from its redesigned full-sized SUVs. The first of the new SUVs, the Chevrolet Tahoe and GMC Yukon, debuted this month.

"Fundamentally, what you need is a turnaround in the sales position, and it all depends" on the SUVs, Rogers says.

Analysts also are wary of crises that might eat up cash quickly. In a research note, Merrill Lynch automotive analyst John Murphy wrote that GM faces "a number of wild cards" such as a possible Delphi Corp. strike that could cripple production, a US Securities and Exchange Commission probe of pension funding and pressure from billionaire investor Kirk Kerkorian.

GM spokesman Jerry Dubrowski admits that the erosion of cash last year was significant. But the company partially replenished its cash reserves with dividend payouts from General Motors Acceptance Corp. and by withdrawing money from a trust fund established for retirees' health care.

If one counts one-time gains and losses, GM's cash on hand fell only $2800 million. "You can't just take the negatives," Dubrowski notes. "You have to take the positives, too."

Problem: North America

But that's small comfort in light of GM's distress in its home market. And in a conference call Thursday, Jan. 26, with analysts and reporters, GM cfo Fritz Henderson did not try to sugarcoat the results.

GM posted a fourth-quarter net loss of $4780 million as its North American operation suffered high costs, declining market share and poor SUV sales. Excluding one-time items, the company posted a loss of $3390 million for 2005 and a loss of $1180 million for the quarter.

"Frankly, the losses are quite clear, they're very large and they're substantially in North America," Henderson said.

Henderson expressed optimism that results would improve significantly following a turnaround plan that involves shutting plants, cutting jobs, reducing health care expenses and trimming sticker prices. He said he expects GM's new full-sized SUVs will be a hit.

"We do expect substantial improvement in North American results in 2006 and 2007," Henderson said. "There's really no other choice."

But there's more bad news. Although GM already has launched its cost-cutting plan, the financial benefits won't be felt for a while, notes Citigroup analyst Rogers.

"There's no question they're addressing issues," Rogers says. "But most of the things they're doing in the North American recovery plan won't affect GM's cash flow until 2007 or 2008."

Until then, hang on.

From Automotive News (A Crain publication)