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.
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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