Auditors Raise Doubts on GM’s Ability to Survive
By Chris Haak
We mentioned just last week in our “Check Your Mirrors” news summary that GM’s auditors, Deloitte & Touche, were likely to slap the company with a statement that raised doubts about the company’s ability to continue as a going concern.
Today, GM filed its 10K with the SEC, and indeed, that statement is in there. It reads, in part:
There is substantial doubt about our ability to continue as a going concern.
Our independent public accounting firm has issued an opinion on our consolidated financial statements that states that the consolidated financial statements were prepared assuming we will continue as a going concern and further states that our recurring losses from operations, stockholders’ deficit and inability to generate sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern. Our plans concerning these matters, including our Viability Plan, are discussed in Note 2 to the accompanying audited consolidated financial statements. Our future is dependent on our ability to execute our Viability Plan successfully or otherwise address these matters. If we fail to do so for any reason, we would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the U.S. Bankruptcy Code.
Doesn’t sound good, does it? There’s more with the next paragraph in the 10K; all of this is found in the “Risks Related to us and our Automotive Businesses” section of the 10K, on page 20 of the document.
Our business, the success of our Viability Plan and our ability to continue as a going concern are highly dependent on sales volume. In 2008, global vehicle sales declined rapidly and there is no assurance that the global automobile market will recover or that it will not suffer a significant further downturn.
Our business and financial results are highly sensitive to sales volume, as demonstrated by the effect of sharp declines in vehicle sales in the United States since 2007 and globally during 2008. Vehicle sales in the United States have fallen 40% since their peak in 2007, and sales globally have declined 23.5% since their peak in January 2008. The deteriorating economic and market conditions that have driven the drop in vehicle sales, including declines in real estate values and household incomes, rising unemployment, tightened credit markets, weakened consumer confidence and volatility in oil prices, are not likely to improve during 2009 and may continue past that year. Our Viability Plan is based on assumptions that vehicle sales will decline further in 2009 but that they will begin to recover in 2010. Sales volumes may decline more severely or take longer to recover than we expect, however, and if they do, our results of operations and financial condition and the success of the Viability Plan will be materially adversely affected.
Part of the reason for this disclosure is for D&T to cover their butts from investor lawsuits in a post-Enron world (investors could likely successfully sue the auditors if they didn’t raise concerns about GM’s viability) and part of the reason for the disclosure is that GM is really, REALLY hurting. In spite of all the restructuring work that GM is undertaking, it’s not happening fast enough. Yesterday when I analyzed the February 2009 sales results, I pointed out several models with monthly sales in the mid-three digit range. GM should be killing those models immediately.
The impact of this “going concern” statement goes much further than optics and perception. GM has certain agreements in place with its creditors that require immediate repayment of outstanding debt if the company’s auditors raise concerns about GM’s ability to continue operations. According to today’s Wall Street Journal, GM has obtained waivers from these creditors, so in the short term is safe from that standpoint. However, GM also must be a “viable” company in the eyes of the Federal government in order to meet the terms of the bridge loans granted beginning in December 2008. If the government decides that GM’s viability plan is not viable, the loans could be called, which would force GM into bankruptcy.
The “going concern” worries from GM will trickle down into its supplier base. If GM is not likely to remain viable, that brings the health of its suppliers into question as well, so many of GM’s suppliers (at least those that aren’t as well-diversified, and are also in poor financial health) will likely see “going concern” warnings affixed to their 10Ks by their outside auditors.
And so the auto industry depression continues.
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