Skip to comments.GM's Mysterious Earnings Report
Posted on 02/14/2013 10:41:35 AM PST by jazusamo
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 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. 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 billion tax benefit.
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.
“Hourly workers will receive close to $7,000 each in bonuses, despite the fact that GM missed earnings estimates.”
Can you imaging what they’ll get if/when GM ever again makes a profit? Shazzam! I’m in the wrong line of work.
IF the auto bailout had worked (??? because they were short on cash at the time??? I still don't get the reason for auto bailout, but that's beside the point), GM turned their business around and become a viable company, then they don't need to pull this stunt.
But we all know that's not the case. This 'mysterious earnings report' showed that GM will continue to need 'future bailout(s)'. Just like Obama's Coninuous Loop of Stimulus money to 'jump start our economy'.
The best description of that is "the patient is dying from multiple organ failures, and the doctor keeps pumping in viagra".
Give credit where credit is due.
Too big to fail...the perfect business model!
The Chevy Volt is a money loser and now they're coming out with the Cad ELR which is a much fancier Volt selling for a lot more money.
With the recent bad news that the Chevy Malibu is getting killed by the competition it seems that won't help the bottom line for GM.
Article on that in case you haven't seen it:
So Romney was right? GM should of done a traditional BK?
Not all that mysterious... On the Goodwill writeoff GAAP requires you to value the acquisitions you make periodically and if the present value of the future cash flows is less than what you paid for the business then you write down the asset to the fair value. Used to you would amortize goodwill over a period of time (typically 15-30 years). That method changed a few years back to the current one. the event is non-cash and has no impact on real earnings. For example my company wrote off about a billion in goodwill in 2009 and it had no impact on us at all. We excluded it from our non-GAAP earnings as well. It’s an accounting exercise.
The release of the valuation allowance is more complicated. Here’s the description from Wikinvest:
“A valuation allowance is a balance sheet line item that offsets all or a portion of the value of a company’s deferred tax assets because the company doesn’t expect it will be able to realize this value.
Sometimes, a company expects it will not be able to realize the benefits of its deferred tax assets. For example, If a company loses $10 million, it would record a deferred tax asset representing the decrease in taxes on its next $10 million in earnings. However, if the company doesn’t expect profits for the next several years, and doesn’t expect to earn $10 million in the seven-year time horizon before these deferred tax assets expire, it can’t record them at full value - because the company won’t be able to take advantage of this tax benefit.
If a company expects there is more than 50% chance it will not be able to realize some of its deferred tax assets (because its future income won’t be large enough to take full advantage of these tax breaks), it must report a valuation allowance to account for this.”
Thanks, I’m no accountant either and was hoping someone would post what you just did.
I believe so, it would have saved taxpayers a lot of money and required GM to buckle down and get back in the automobile business. Of course it would have invalidated UAW contracts and cost union members a lot. That’s my take on it.
No problem. My company had a “valuation allowance release” in the last quarter as well. We also adjusted it out on non-GAAP earnings. It’s not all that uncommon. The accounting rules have gotten so whacky that it’s hard to keep track. Our “adjusted” earnings (or non-GAAP) are meant to show investors what the underlying business is actually doing and not get bogged down in esoteric accounting rules that don’t impact actual cash performance.
GM doesn’t deserve a dime until all former holders of GM bonds are repaid.
Amen to that...That turned out to be legalized robbery.
Thanks, I hadn’t seen that.
GM uses non-GAAP
FWIW, I've had a couple modules of Acctg a while back and this was way above that, but many here me included, do not trust what GM has done. It is a gut feel thing. And how in the Frank-Dodd / Sarbanes Oxley world do they live without being GAAP? We know how they got away with the carry forward of 45 billion in losses in the non-bankruptcy, but their hidden liabilities are the VEBA liabilities that while not their paper, they in essense are still on the hook for IMHO. They tried to buy out old employee pensions, and that is done, But the Union Pension(s) are who's liability at this point? I still stand on my prediction, this entity may have to go Chapter 11 again, something doesn't pass the smell test.
Tell me where I am wrong here....
SEC rules state that Non-GAAP measures cannot be presented without a reconciliation from GAAP to Non-GAAP. Additionally you cannot present the Non-GAAP measure "more prominently" than the GAAP measures.
In our public filings we have safe harbor language on Non-GAAP financial measures that states in part, "The Company presents adjusted operating income (loss), adjusted operating margin, adjusted EBITDA and adjusted EBITDA margin because these are measures management believes are frequently used by securities analysts, investors and other interested parties in the evaluation of financial performance."
Additionally we state, "These non-GAAP measures have limitations as analytical tools, and securities analysts, investors and other interested parties should not consider any of these non-GAAP measures in isolation or as a substitute for analysis of the Company's results as reported under accounting principles generally accepted in the United States ("GAAP"). These non-GAAP measures may not be comparable to similarly titled measures used by other companies."
Finally we say, "A reconciliation of non-GAAP to GAAP results is included..." with the presentation, press release, what have you.
Wyatt, was it a $35 billion valuation allowance? The size of the benefit is what’s troubling. This allowed them to clear $27 billion off of goodwill. Another huge number. Very shady. Also interesting that Ally Financial played the same game. Without the allowance, numbers don’t look so great.
GAAP was created for a reason. GM lost about $30 billion using GAAP accounting.
Deferred Tax Valuation Allowance / Goodwill Impairment
- As a result of 3 full years of profitability and the completion of our near and medium term plans forecasting continuing profits, we reversed the majority of the valuation allowance in the U.S. and Canada, recording a $34.9 billion non-cash benefit.
- This triggered a non-cash goodwill impairment charge of $26.2 billion in Q4
GME Impairment of Long Lived and Intangible Assets
- In Q3 we indicated we may impair GME assets if conditions deteriorated
- Industry outlook and other factors have deteriorated since Q3 so we are now impairing long-lived assets in Europe, recording a $5.2 billion non-cash charge
What you need to know is that these are all non-cash events. The reserve for valuation allowance was put on the books in case they could use their operating loss carryforwards in the future. Because of their profitability they will now get to use those so the reserve is no longer needed so they reverse the earnings hit they took previously and now take it into earnings. It was non-cash when it was a hit and it is non-cash now. In my opinion it is perfectly justifiable for them to adjust these out when they report non-GAAP financials. My company is doing the exact same thing.
Understood. Again, it’s the amounts that raise questions. Backing up to goodwill, GM would have had negative equity without the huge $30 billion of goodwill on the balance sheet. This would have been a kiss of death for the IPO.
Both goodwill and valuation allowance releases are subject to abuse and hard to quantify. Given GM’s history of accounting abuses, the actions throw up a red flag in my opinion. Same holds true for inventory build-up. As noted, US inventory up over 20% since last year. Revenue only up 5%. Do the math and actual results not pretty.
I’m still waiting for the explaination of how he can legally take my GM bond and virtually give it to the UAW.
Understood and agree on the inventory. Zero Hedge has been discussing GM’s channel stuffing for a while.
On the goodwill/intangible writedown I’ll have to defer to their auditors. market conditions have certainly changed which impacts the impairment testing. My company went public in 2006. We have a fair amount of exposure to resi construction. In 2009 after it all went to hell our impairment testing models showed we needed to write-off the goodwill.
It’s too bad GM is still making mostly crap since Cadillac is finally producing a fairly decent competitor with its ATS.
“he can legally take my GM bond and virtually give it to the UAW”
He can’t. It was not legal.
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