GM Recovery in Reverse as Earnings Disappoint
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.