GM loses $39 billion in third quarter, but autos are profitable
General Motors announced its third quarter earnings today and surprised Wall Street by revealing a $38.6 billion charge on the books that represents a change in tax accounting required by the Financial Accounting Standards Board's Statement of Financial Accounting Standards. That huge number represents tax credits the automaker can't account for until it actually earns the taxable income to which it applies. Even without considering the tax adjustment of $38.6 billion and other special items like the $3.5 billion sale of Allison Transmission, GM still lost around $1.6 billion last quarter, compared to the $497 million profit it earned for the same quarter last year.
Despite the red ink on paper, GM's auto business actually performed well in the third quarter. It recorded a profit of $122 million compared with a loss of $577 million in Q3 2006. Global sales reached 2.39 million vehicles, up 4 percent from last year and a record for the company.
Nevertheless, the tax accounting adjustment that led to a total loss of around $39 billion stands as the largest quarterly loss ever for GM, surpassing the $21 billion hit the company took in 1992. As such, the announcement of GM's earnings today have been driving down the Dow Jones Industrial Average. At 11:48 AM EST, the Dow is down 143.80 points.
[Source: The Detroit News, BloggingStocks]
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Reader Comments (Page 1 of 1)
Wally 12:19PM (11/07/2007)
That's slightly more than I made last year.
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Tim 12:34PM (11/07/2007)
"Lost another 39 billion to Ditech."
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Jackie B. 12:43PM (11/07/2007)
Ouch, that's gotta hurt!
rem83 12:43PM (11/07/2007)
So does this mean Q1 2008 GM will be able to claim a $38.6 billion gain?
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Dan in real life 12:50PM (11/07/2007)
Toyota made 9 billion operating profit first half of the year....expecting 21 billion operating profit with about 15 billion of net income for the full year..
what else can I say...so much for competition.
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compy386 1:00PM (11/07/2007)
I posted this on TTAC just in case any one is curious:
Fun With Finance:
I decided to take a quick look at GM’s balance sheet and see if I can implicitly get back to their write-off decision.
GM’s current market cap. is about 19 billion and had a deferred tax asset of 43 billion as of last quarter and a deferred tax liability of less than 1 billion.
I roughly estimated GM making 1.1 next year growing at 4% per year. Discounted at 10% that gets GM’s valuation to about 19 billion (market cap).
Using these numbers I figured that GM’s deferred tax asset would be exhausted in 2050 and have a present value of less than 6 billion. That means that the asset is overstated on the balance sheet about 37 billion (close to the actual write-off). You can question some of those details but it gets you to a close estimation. With that said, I did all of these calculations based on data available last quarter. This write-off should not have come to a surprise to anyone. Ford (which I own stock in) has only a 4 billion deferred tax asset and 3 billion in deferred tax liability. I don’t expect a similar announcement from Ford tomorrow (reason why I did this math in the first place).
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Geoff 1:21PM (11/07/2007)
You are confusing a write-down with a write-off. A valuation allowance was setup against the asset. It is possible that the allowance can be decreased and the asset written back up if the company can maintain profitability for a forseeable length of time. The valuation allowance is required when you have past losses but a lack of evidence of future profits.
The lack of evidence of future profits is the key thing to focus on here, because it shows that their business will be weak for the forseeable future. This company is a dog.
compy386 1:44PM (11/07/2007)
That's not really true. It has nothing to do with whether or not GM expects profits in the future. It's that the valuation of the asset does not match the fair value of that asset. In reality the fair value of the asset is only worth about 6 billion according to my calculation. Whether they set up a valuation contra-asset or write-off the asset completely is fairly irrelavent. The net accounting would be the same. GM will be able to keep these credits indefinitely (not a tax person so it's only an assumption). However GM would have to make a rediculous amount of money for them to take advantage of this. I'm not sure what the rule for impairment actually is, but even if GM made 20 billion a year growing at 5% (making their company worth about 380 billion) the NPV of this asset is only worth 34 billion. GM would still have to do a write-down of about 9 billion.
Mike 4:54PM (11/07/2007)
The fair value of the asset is directly related to the future expected profitability of the company, as deferred tax assets can only be realized if the company generates taxable income. Assets are deemed impaired if the expected future cash flows are estimated to be lower than the carrying value of that asset. In this case, the deferred tax asset is deemed to be impaired because the future cash flows related to it (taxable income) are not expected to generate the carrying value of benefit. This is directly related to management's expectation of future profitability.
JMa 1:02PM (11/07/2007)
This isn't a cash loss. This is a writedown in a tax asset (which arose when GM posted all of its losses). Because tax assets have a finite life, if management can't prove to the auditors that they will be able to aply all of the tax assets against future tax liabilities when GM becomes profitable, than they must be written off. This has nothing to do with management, build quality, unions...
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Drew 1:46PM (11/07/2007)
The scary part about this quarter is that it includes a $3.5b net gain from the sale of Allison.
Allison, Mesa Proving Grounds, Fuji (Subaru), Suzuki and 50% of GMAC are all sold and now accounted for.
Without these multi-billion dollar infusions of cash, GM's future quarters look to be grim. This is probably why their CFO won't comment on when they'll be profitable again.
-Drew
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Geoff 2:34PM (11/07/2007)
It has everything to do with whether or not GM expects profits in the future! A deferred tax asset's value is based upon the estimation of the company's ability to use it in future years. So....... If the company isnt going to be able to be profitable and thus use the tax shielding that the deferred tax asset would provide, its value gets written down. They cant keep the tax credits indefinitely, thats why the value is written down, it is because of the belief that the loss carryfowards will expire without being used and therefore have no value.
The net accounting is also not the same as you say, a valuation allowance can be reversed like I originally said. If you write something off, you cannot reverse that.
Aki 2:22PM (11/07/2007)
Given how I know very little about how taxes work, can somebody explain to me in caveman terms what a "tax adjustment" is? Other comments leave me scratching my head. So they'll potentially get back all of the $38.6 billion if they get the income to reap the tax credits?
And how/why does John Neff say autos are profitable? I just see a $1.6bil loss not counting the selling of Allison or the tax adjustment? This post confuses the heck out of me.
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Dave 7:21PM (11/07/2007)
Aki-
The first thing you have to know is that corporations handle their accounting on an accrual basis rather than a cash basis.
That basically means that all income and expenses are in the ledger before they actually happen.
If that makes no sense to you, you are beginning to understand corporate accounting.
Geoff 2:45PM (11/07/2007)
On a global basis, the auto segment was profitable ($176 million). North America was a loss but a smaller loss than last year (-$247 mil vs -$660 mil). International's profit offset the weakness in North America. To answer your tax question... If you have a loss in your business or have to take a loss on certain debts, you can create a tax asset. The asset basically is prepaid taxes. You can use this asset when you eventually return to profitablity and it comes time to pay uncle same. For instance, if you have a $1million deferred tax asset and owe $5million in taxes, you can use the $1million to offset this. It is possible that GM could eventually reverse the charge they made this quarter but probably very unlikely.
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Golferal 3:15PM (11/07/2007)
As soon as I read this story, I thought "Oh God, the GM hatin' commenters are gonna attack this like nobody's business!" So far only one "Toyota is better" comment!
Bottom line, when companies get as large and diverse as GM, the bookkeeping is going be dicey no matter how closely you look at it. I might be a bit naive, but I think they're better off if they don't show profits so they can avoid as much as corporate tax as possible. Am I wrong here?
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Drew 3:57PM (11/07/2007)
Well when you have a string of red quarters dating back almost half a decade, the company's credit rating starts getting battered. When that happens, it costs much more to borrow money, and the interest payments on debt rise to the point where GM pays more in interest on its debt than many of their profitable competitors spend on their R&D.
These are real losses that have been obscured by the fire-sale of assets as I mentioned above (Mesa, Fuji, Suzuki, Allison, GMAC, etc.). GM's bank accounts are very thin and borrowing funds to develop the admittedly great new products is costing them a fortune. These costs far eclipse any benefits from reduced taxes.
Now the cupboard is bare and there's not much left to sell. GM lost a very real $1.6b in its operations in the last three months and now that they can't borrow much money, can't obscure losses with asset sales, and have blown their wad on (gorgeous) new gas guzzlers just as oil is reaching for $100 a barrel, pickup-truck-buying contractors are getting laid off, and HELOC-millionaires have their ATMs foreclosed on, it could get very ugly very quickly at the RenCen.
GM would have to sell 800,000 new Malibus, each at a $2,000 net profit, to erase this one quarter's financial damage. Give that a minute to sink in.
-Drew
Golferal 4:48PM (11/07/2007)
GM may have sold off some assets, but they would not have done so if it was no beneficial to do so in the long run. It's very possible that the "appendages" they unloaded may have been more of a long term liabilities than assets, or that cash in hand now was more appealing than the distraction of managing those companies.
Many large companies "rob Peter to pay Paul", and there may be some of that going on here but I will trust the finaceers at GM more so than some commenter on a blog. I for one, am not worried one bit about GM or it's longevity.
Mike 4:42PM (11/07/2007)
Keep in mind that deferred tax assets and liabilities are recorded at the expected effective tax rate in effect when they will eventually be utilized. That means for a $1,000,000 deferred tax asset to be fully utilized, a company would have to generate $2,500,000 of taxable income (assuming a tax rate of 40%).
In GM's case this $39B would only be expected to be fully utilized if the company could generate $97.5B in taxable income (again assuming a tax rate of 40%).
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