GM Recovery in Reverse as Earnings Disappoint

NLPC ^ | February 21, 2013 | Mark Modica

[jazusamo]

General Motors released its disappointing earnings report last week to the sound of crickets. While financial TV news networks (along with most analysts and journalists) ignored the negative aspects of the release, share price has fallen over 5% in less than a week since the news hit. The earnings release and subsequent SEC 10K (annual report) expose the fact that GM's recovery is not the success that the Obama Administration and media portray. The lack of the fanfare that typically comes with GM earnings releases is as good an indication of the meaning behind the numbers as is the decline in share price.

The most glaring red flag in the latest financial reporting by GM is the unusually high amount of one-time adjustments to earnings. I previously reported that GM would have had about a $30 billion loss for the year if it did not rely on a $35 billion tax benefit , which was recorded as income on its statements. This wiped out a huge loss, much of which was caused by a "goodwill impairment" that resulted as the unsustainable (and questionable) huge amount of goodwill (an intangible asset) that was on GM's balance sheet had to be reduced. I questioned the amount of goodwill over two years ago and now it seems that one questionable intangible asset has been replaced with another shady one known as "deferred tax assets." Be that as it may, there are other areas that give further evidence that GM is headed in the wrong direction, the most important of which is the lack of revenue growth.

It is first necessary to recognize that the most important region for GM is North America (NA). This is the primary driver of profits for the company, despite the hoopla of Chinese or Russian potential. The indisputable fact is that GM has been losing market share in NA. Putting aside opinions and generalities, we can look at clear figures here. GM NA market share has fallen from 19.2% a year ago to 17.5% today. That brings us to the even more crucial measurable of revenue, which has been manipulated by inventory build-up by GM.

This might be the most important indicator of which direction GM is going in, so pay attention to these figures. Total revenue for GM is reported to have risen for the year to the tune of about $2 billion. The revenue growth is supposedly driven by improved sales in NA, which saw an even healthier (apparently) increase of a bit over $4 billion. Before celebrating the growth, pay attention to where the revenue "growth" came from as inventories rose at GM dealerships, another shady example of how GM's numbers can be manipulated to appear better than they are. How is it that revenues are growing so much while market share is declining?

Again, the reported figures give the answers. NA inventory at dealerships for GM have increased over 20% since the end of 2011. Specifically, GM reported that there are 717,000 vehicles in inventory at the end of 2012 compared to 583,000 at the end of 2011. That would account for the reported "growth" of revenue as GM is able to record vehicles that go to dealerships as "sales," even though consumers haven't purchased them. I calculate that the increase in inventory (known as channel stuffing, a ploy used by GM in the past ) accounts for about all of the NA revenue growth. If inventory had not increased so much in 2012, GM's overall revenue would have actually fallen by about $2 billion. And this during a perceived "great auto industry turnaround."

There are more reasons to be wary of the proclamations by pundits, politicians and the media that GM is doing great. Even looking at GM's manipulated reported earnings shows that operating income is down about 30% year over year. Specifically the reported income has fallen from $9.3 billion in 2011 to $6.1 billion in 2012. Where is the growth story in that?

Want more reasons to be nervous? How about underfunded pensions as the UAW obligations continue to weigh on the company? Again, what is reported by GM and the media does not give an accurate picture. GM likes to discuss pensions only in terms of US pension obligations. The fact is that worldwide underfunding of pensions has continued to grow and has gone from $25.2 billion last year to $27.4 billion, another $2.2 billion of liabilities added. That's enough of a concern to have the situation listed as a risk factor by GM on their filing, where they state, "Our defined benefit pension plans are currently underfunded, and our pension funding requirements could increase significantly due to a reduction in funded status as a result of a variety of factors, including weak performance of financial markets, declining interest rates, and investments that do not achieve adequate returns."

In fact, we can learn about some of the most troubling risk factors by reading GM's own words in the SEC filing. On Europe, "Our business plan contemplates that we restructure our operations in various European countries, but we may not succeed in doing so, and our failure to restructure these operations in a cost-effective and non-disruptive manner could have a material adverse effect on our business and results of operations." Well, we knew Europe was a mess; but it is too convenient to lay all the blame for GM's shortfall on Europe.

Let's back up to the highly questionable $35 billion tax benefit. It is very likely that GM will have to address the speculative benefit in the future as they themselves warn:

The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and future profitability. Our accounting for deferred tax consequences represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material effect on our financial condition and results of operations.

Lastly, let's speculate on some of the reasons that GM is losing market share. I recently reported on the disappointing sales figures for the Chevy Malibu , which seems to have taken a back seat to cars like the Chevy Volt when it comes to GM's focus. The Malibu is in the midsize segment, which has a much greater potential for sales than niche vehicles like the Volt. While electric car sales have gone nowhere and other manufacturers like Nissan and Toyota are backing off on their plans to focus on the "green" cars , GM says damn the torpedoes and full speed ahead! GM is losing money on the Volt and losing ground to the competition with the Malibu, but here's what they say about their politically-motivated strategy, "In 2013 we plan to produce the Chevrolet Spark pure electric vehicle and plan to invest heavily to support the expansion of our electric vehicle offerings and in-house development and manufacturing capabilities of advanced batteries, electric motors and power control systems." That's not all, here's more from the SEC release:

Our planned investment in new technology in the future is significant and may not be funded at anticipated levels and, even if funded at anticipated levels, may not result in successful vehicle applications. We intend to invest significant capital resources to support our products and to develop new technology. In addition, we plan to invest heavily in alternative fuel and advanced propulsion technologies between 2013 and 2014, largely to support our planned expansion of hybrid and electric vehicles.

GM's Obama-appointed management does not seem to have the ship headed in the right direction. Cash and marketable securities have decreased from $32.2 billion to $27.3 billion, even as questionable methods prop up the figures. US taxpayers paid $50 billion to bail out GM because of what was called "systemic risk" for the entire industry if GM failed. It would be wise for pundits and politicians to question if GM is really now safe from a future bankruptcy that would again put taxpayers and the economy at risk. Treasury and the current management have played their roles, it is time for them to move on and let GM operate as a truly private sector company with an eye on profits instead of on politics, before it is too late.

Mark Modica is an NLPC Associate fellow.

[Rocky]

Another “dog bites man” headline.

[Elsiejay]

And this despite the GM’s economically unsustainable UAW retirement benefit contract costs having been made part of the U. S. Government/Taxpayers multi trillion dollar debt, via the Stimulus spending gimmick.

[hondact200]

GMC = General Mess of Cr@p (i censored it).

Chevy Volt
Chevy Malibu
Chevy Spark

See a pattern electric, hybrid do not sell do not work.

Looks like my next car will be either a Ford, Honda, Toyota or Volkswagen. The way it is going there will be only 1 US Car Manufacturer Ford

[Wyatt's Torch]

Bump for later

[Pollster1]

I rarely wish anyone ill, but GM and those who deal with it are exceptions. The “Old GM” bankruptcy was shockingly corrupt, even by the standards of Obama’s conduct. I hope GM dies either a quick death or a slow death, but I want that company to disappear and leave nothing behind. I have no sympathy for “New GM” stockholders who lose money, for “New GM” customers who find out they bought a lousy product, or for “New GM” employees who get shafted by what they already know to be a corrupt company. I am boycotting GM forever because of their corruption, and I have no sympathy for anyone who is hoping for a good deal at the expense of those “New GM” ripped off.

[jazusamo]

Yep, the UAW retirement contract certainly benefitted at the cost of GM bondholders and taxpayers but they’re not out of the woods yet unless it remains Government Motors. The government has no business financing companies, get ‘em out.

[jazusamo]

Please bump the Freepathon or click above and donate or become a monthly donor!

[blueunicorn6]

In my little city, when the price of gasoline went down, the young men were out buying new pickups. The price of gas is going back up.

[Boomer One]

Well, I guess the rise in gasoline prices spells doom for the new Corvette Stingray even before it gets into showrooms. If they think this will push us into Volts, they're wrong. People will just keep cars longer resulting in even less sales and the need for another GM (Union) bailout. We had a phrase for this in banking and it was called “throwing good money after bad”. Upset the natural order of things and you only delay the inevitable result, bankruptcy in this case.

[Wyatt's Torch]

Cash and marketable securities have decreased from $32.2 billion to $27.3 billion, even as questionable methods prop up the figures.

This isn't the whole story (and I'm not covering the "questionable methods" stuff yet again). Yes their cash and marketable securities are down. But if a company breaks even on free cash flow (cash flow from operations less CapEx) and then uses cash to pay down $5 billion in debt is that a sign of the company going in the wrong direction? Absolutely not. For FY12 GM generated $10.6 billion in cash flow from operations ans spent $8.1 billion in Cap Ex which results in Free Cash Flow of $2.5 billion. Being FCF positive is a very good thing. In fact, the $2.5 billion is higher than FY11 FCF of $1.9 billion and equal to the FY10 level of $2.5 billion. Where they used their cash was in the repayment of debt $7.4 billion and the repurchase of stock $5.1 billion. I have not taken the time to see if this stock repurchase was common shares or government shares. If it's common repurchase then that is a very common practice of returning cash to shareholders (see David Einhorn and AAPL). If it's the repurchase of government shares then that's also a good thing. Just because cash declines doesn't mean it's a bad thing. Take a look at the components of the statement of cash flows to see what is going on. If they are bleeding FCF then the conversation about "going the wrong way" is relevant.

[blueunicorn6]

I don’t see a good future for GM. Toyota is selling the Prius for $20,000. They can’t sell Volts for that kind of money. The rising gas prices will put a damper on pickup and large SUV sales. And I don’t see GM coming up with attractive new cars. The only way for them to make it is with more taxpayer money. And they’ll just produce worse and worse cars because they won’t have to compete.

[Tea Party Terrorist]

Just bought a BNW made in Greenville, SC. They are making them there and shipping them to Europe too.