Friday, August 1, 2008

The Detroit Death March

From Bloomberg:

General Motors Corp., the largest U.S. automaker, reported a second-quarter loss of $15.5 billion because of strains from truck leases, costs from labor disputes and plunging U.S. sales.


The mounting losses are siphoning resources Chief Executive Officer Rick Wagoner, 55, needs to develop fuel-saving cars to replace the pickup trucks and sport-utility vehicles being abandoned by U.S. buyers. Wagoner, now in his 9th year as CEO, won't project when GM will restore profit as he cuts costs by an additional $9 billion annually and carries out a plan to boost cash by as much as $17 billion.

``The trends that are out of their control, those are the things that have the potential to overwhelm them,'' Robert Schulz, a debt analyst at Standard & Poor's, said yesterday. He was referring to record gasoline prices that have transformed consumer behavior while a weakened U.S. economy drains auto sales to 15-year lows. ``We don't see the macro environment anywhere near on the mend,'' Schulz said.


S&P yesterday cut GM's credit rating one level to B-, or six steps below investment grade, because falling U.S. sales are causing the automaker to use more cash than anticipated. With the U.S. auto slump expected to carry into next year, GM faces a risk of further cuts, Schulz said. GM had the highest rating, AAA, from 1953 until 1981.

Declining sales, increasing impairment costs and a drop in its credit rating. What great news. It couldn't get much better.

The real question is cash flow. This is the second time I've seen a news story that said the real concern was GM is burning cash faster than anticipated. As a result, their ability to fund the turnaround is inhibited. For the quarter ended March 31, they burned through $3.2 billion in cash. They also had $28.9 billion in cash and short term investments. At that pace and all other things being equal, they've got 9 quarters of cash on hand. If we add in $9.6 billion in receivables, then we increase their available cash to 12 quarters or three years. In addition, with the drop in their credit rating borrowing for that will be more expensive. And who will want to lend money to a company that has negative book value and stagnant sales?