General Motors (GM) reported full year 2012 earnings on February 14, 2013, and management was very happy with the results:
From every vantage point, 2012 was another solid year for General Motors. As you can see on slide two, we grew both our sales and top line revenue [and]
inearned net income attributable to common stockholders of about $4.9 billion.
Source: Seeking Alpha Call Transcript
However, let's look at how GM "earned" this $4.9 billion. Below is a spreadsheet I made from GM's earnings release:
One can see that in 2012, GM "earned" $34.8 billion from income taxes (highlighted in orange), which then let the company report a profit to common shareholders.
I also computed GM's operating costs before goodwill was written down, since in 2012 GM wrote down goodwill by $27 billion, and found that operating income was -$3.2 billion in 2012 (highlighted in yellow). This is down from $6.9 billion in 2011.
Operating costs rose 8.47%, while sales only grew 1.32%. Even if GM's sales raise to the average estimate of $157.11 billion (as of this writing) in 2013, this is only 3.2% growth, where as COGS (without goodwill) has risen 8.47% in 2012 and 9.85% in 2011.
On page 8 of the earnings release, the company even showed better capacity utilization for the whole year -- 97.5% vs 95.6% -- and quantity of units sold was shown increasing, on page 7, from 9.024 mm to 9.288 mm worldwide. One would think this would lower per unit fixed costs. However, costs still rose more than sales, so GM needs to control its variable costs better, if it can. An investor would also be wise to understand what this means to automotive parts suppliers.
Cash Flow and Liquidity
For the fourth quarter of 2012, automotive cash flow from operating activities was $0.5 billion, compared to $1.2 billion in 2011. In the fourth quarter of 2012, adjusted automotive free cash flow was $1.1 billion, compared to $(0.2) billion in 2011. For the year, adjusted automotive free cash flow was $4.3 billion, compared to $3.0 billion a year ago.
Source: Earnings Release
GM seems happy with its cash flow performance, as implied in the quote above from its press release. It even provides this nice table:
Source: Earnings Release
However, this table does show "Automotive free cash flow" as being negative for the 4th quarter, and increasing over last year. I made my own adjustments to GM's table to make this easier to see, for me at least:
GM is claiming an increase of over $1.5 billion for the year in automotive free cash flow, however, this "cash" did not increase cash on the balance sheet, at least when cash and marketable securities are totaled together. These line items actually decreased $4.8 billion from a year ago.
The above evidence leads me to disagree with management's statement: "From every vantage point, 2012 was another solid year for General Motors." Any year where operating income is negative cannot be a "solid year," and stay tuned to check out how much sub-prime lending GM did last quarter when its full 10-K is filed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.