GM's Mysterious Earnings Report
General Motors reported earnings today that appeared non-eventful on the surface. Upon further inspection there are some underlying concerns, including a glaring one-time event that stands out. That is an adjustment to earnings with a tax benefit (as opposed to paying taxes) of $35 billion for a "deferred tax valuation release." This was coupled with a goodwill impairment charge of about $27 billion, which allows GM to reduce the previously unusually high goodwill assets that were recorded on its balance sheet.
GM uses non-GAAP (Generally Accepted Accounting Principles) to calculate its calendar year operating income of $7.9 billion. The GAAP number does not allow the tax benefit and is a bit more troubling at a LOSS of $30.4 billion. I do not claim to be an accountant, but the huge numbers thrown around here could be a concern and should be further investigated. My understanding of the tax benefit, in simple terms, is that GM is taking as income the $35 billion in tax savings it says it will have in the future as a result of the sweetheart deal it got when the Obama Administration allowed it to have billions of dollars in tax-loss carryover credits, thus giving the company years of tax-free income.
In my opinion, GM has had a history of being a bit lenient with their accounting standards and the latest adjustments to earnings should not be ignored. Coincidentally, government-owned Ally Financial (previously GMAC), which is tied at the hip to GM, recently also reported earnings driven by an approximate $1.3 billion similar tax benefit. It seems that both GM and Ally Financial may have come up with a way to help fudge current earnings by using the questionable tax benefits.
If the concerns about the accounting confusion turn out to be unwarranted, there are other items that continue to weigh on GM. European operations see no end to the woes there with a loss of $1.8 billion for the 2012 year and a $5.2 billion "impairment" charge on assets. UAW obligations continue to grow with underfunded pension obligations rising to $26.9 billion and a charge of $2.2 billion for a pension settlement that did little to reduce underfunded liabilities, as I had previously noted back in June when the move to offset some obligations to Prudential was hyped as a saving grace for the underfunded pensions.
While North America revenue appeared to grow about 5% from last year's fourth quarter, it is important to note that inventories rose over 20%. Revenues are recorded when vehicles are shipped to dealerships, so any revenue growth is more than accounted for by the increased inventories at dealerships and not driven by increased sales to consumers. In fact, GM actually lost more ground in the US, with market share hitting a new low of 17.1% for the fourth quarter, down from 18% a year ago. Cash and marketable securities also decreased $5.5 billion from a year ago.
Of course, none of the negatives will prevent the politically-favored UAW from benefiting with another big payout. Hourly workers will receive close to $7,000 each in bonuses, despite the fact that GM missed earnings estimates. Taxpayers will not fare as well, with the estimated loss on the GM bailout being in the $15 billion range while the company continues to get a free ride by not paying its fair share in taxes. I'm sure none of the above-mentioned facts will prevent the Obama Administration and the media from continuing to portray the auto bailouts as a great success. I continue to disagree with that assertion, and we may see the continuing problems at GM eventually weigh heavily on the company's turnaround prospects.
Mark Modica is an NLPC Associate Fellow.