|GM gets paid by dealers as soon as new cars are shipped but delays payments to suppliers until the second day of the month, boosting its quarter-ending cash balance.|
NEW YORK (CNNMoney.com) -
How deep are General Motors' pockets -- really?
It seems a strange question to ask about a company with $19.2 billion in cash and short-term investments on the balance sheet for its troubled auto operations, and even more cash on hand for its finance unit, GMAC.
But given the doubts and troubles facing the world's largest automaker, it's a very important question.
And the answer is that the $19 billion might not be as much money as it appears to be at first blush. Some of the funds are committed to pay future retiree health care benefits and some is cash that GM (Research) will owe back to dealers for incentives.
A spokesman for the troubled automaker says that all of the accounting practices used to report that $19 billion figure are well established and have been in use for years, and that the company, no matter its other problems, isn't facing any kind of cash crunch.
"Do we have adequate cash and funding to run our business? The answer is yes," said GM spokesman Jerry Dubrowski. "In addition to our large cash balance, we've got a $5.6 billion line of credit we haven't tapped."
But even with that cash balance, the company is struggling to trim billions in losses through plant closings and more than 30,000 job cuts.
It is looking to its retirees and its already troubled supplier base for other cost savings.
And it is being forced to sell a majority stake in GMAC, the company's one profitable bright spot, since the finance unit's bond-rating has been cut to junk bond status because of the parent company's problems.
There are also serious doubts among analysts as to whether the company should and can continue to fork over $1.1 billion annually in dividend payments after it makes a payment next week.
Some analysts say they now see a substantial risk of bankruptcy at GM within the next two years, despite its cost-cutting efforts, a possibility that GM Chairman and CEO Rick Wagoner has flatly said is not in the automaker's plans.
Still, even analysts not ringing the Chapter 11 alarm bells say the cash on GM's balance sheet is inflated by payment practices at GM, which pays suppliers on the second day of each month.
That means that about $6 billion goes out the door soon after it tallies up its cash at the end of each quarter.
"They accumulate all that cash over the course of the month, then pay it out to suppliers who have been basically financing them," said Josh Peters, a former auto analyst and the editor of Morningstar DividendInvestor, a newsletter for the mutual fund tracking service.
In addition, about $4 billion of the money that GM counts as cash in its auto operations is held in a trust fund to pay future retiree health care costs.
GM counts that as part of the auto operations' cash balance because those payments are made out of operating expenses rather than pension fund assets.
Robert Hinchliffe, auto analyst with UBS Securities, also believes that GM's liquidity is tighter than it appears and that the dividend is therefore at risk. He has a sell recommendation on the stock and not surprisingly owns no shares himself.
"It's not that they wouldn't have access to cash," he said. "And I do think bankruptcy can be avoided, even with the challenges, if the economy stays strong.
"But the flip side is that if sales go down for the industry, GM will be under more pressure than imports, and that'll make it tough," he cautioned.
Hinchliffe said that GM's dependence on incentives such as cash-back offers or special pricing to sell its vehicles also boosts cash reserves.
He estimates that $5 billion of the cash on the balance sheet is due to the accrual of incentives that GM will have to pay dealers when a vehicle is actually sold. GM's Dubrowski would not comment on that estimate
"Higher production levels 'generate' cash and 'boost' liquidity as the company carries higher accounts payable and incentive accrual balances," said Hinchliffe.
Peters at the Morningstar newsletter expects GM will soon have to slash or eliminate its dividend, partly to save cash. "GM probably can't operate if it only has $6 billion to $7 billion at the end of the quarter."
The worst-case scenario for GM would be a temporary shutdown in operations due to a work stoppage at Delphi, the bankrupt auto parts maker that is a former GM unit and still its largest parts supplier.
Wagoner is on record saying he expects Delphi to continue to supply GM. Delphi management and the United Auto Workers union are clashing over a management threat to ask the bankruptcy court to void current labor contracts.
If that happens, and the union responds with a strike, Hinchliffe estimates that GM will be burning through $1 billion to $1.5 billion a week of its cash reserves while North American operations are essentially shut. GM's Dubrowski also would not comment on that estimate.
Still, it's not just GM that says it's in a strong position to weather any such storm.
Bob Schulz, a director of auto credit ratings for Standard & Poor's, said that while a Delphi strike would be a serious problem for GM's cash reserves, his firm has yet to set any odds of such a strike taking place.
And while S&P cites a number of challenges for GM, including weak sales of its highly profitable SUVs, huge retiree health care costs and other competitive challenges, he does not count liquidity as a current problem for GM.
"We still think GM's liquidity is one of their strong points," he said.
For more on GM's plans to close 12 plants and cut more than 30,000 jobs, click here.
For more on the perfect storm of problems hitting GM, click here.