Was This A Kitchen Sink Quarter For General Motors?

| About: General Motors (GM)

Summary

The company took a $1.2 billion charge in the never ending recall debacle.

On the bright side the company saw revenue increase by 1% from last year.

The company is reducing operations in Russia by 20% due to the turmoil taking place in the region.

The last time I wrote about General Motors Company (NYSE:GM) I stated:

"I like the stock but I think it could pull back in the near future." I was indeed correct because since that article was published the stock is down 5.93% while the S&P 500 (NYSPY) is up 1.06% in the same timeframe. GM designs, builds and sells cars, trucks and automobile parts globally.

The company reported earnings before the market opened on 24Jul14 and on the surface the results were mixed with the company reporting earnings of $0.58 per share (beating estimates by $0.01) on revenue of $39.6 billion (missing estimates by $1.03 billion). The stock dropped 4.46% the day it reported earnings and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenue (millions)

Q/Q

Y/Y

2Q14

1Q14

2Q13

Automotive

6%

1%

$38,462

$36,315

$38,240

GM Financial

9%

42%

$1,187

$1,093

$835

Total

6%

1%

$39,649

$37,408

$39,075

Compared to last year, total revenue has increased by 1% for the second quarter. The only real notable thing about this portion of the earnings report is that Automotive revenues were flat for the year and accounts for roughly 97% of the company's revenues. The 42% increase in GM Financial is immaterial as it only accounts for 3% of revenues.

Income Statement

Income Statement

Q/Q

Y/Y

2Q14

1Q14

2Q13

Revenue

6%

1%

$39,649

$37,408

$39,075

Automotive cost of sales

5%

6%

$35,851

$34,127

$33,824

GM Financial operating and other expenses

6%

61%

$926

$875

$575

Automotive selling, general and administrative expense

14%

14%

$3,343

$2,941

$2,925

Total costs and expenses

6%

7%

$40,120

$37,943

$37,324

Operating Income

-12%

-127%

$(471)

$(535)

$1,751

Automotive interest expense

-3%

64%

$100

$103

$61

Interest income and other non-operating income, net

-9%

-68%

$81

$89

$251

Loss on extinguishment of debt

N/A

-100%

N/A

N/A

$240

Equity income

-14%

22%

$523

$605

$429

Income before income taxes

-41%

-98%

$33

$56

$2,130

Income tax expense

13%

-134%

$(254)

$(224)

$742

Net income

3%

-79%

$287

$280

$1,388

Net income attributable to noncontrolling interests

-87%

-135%

$(9)

$(67)

$26

Net income attributable to stockholders

31%

-80%

$278

$213

$1,414

Less cummulative dividends on preferred stock

0%

-59%

$(88)

$(88)

$(214)

Less earnings adjustment for dilutive stock compensation rights

-100%

N/A

N/A

$(17)

N/A

Net income attributable to common stockholders

76%

-84%

$190

$108

$1,200

Avg. Diluted shares

0%

1%

1,688

1,691

1,677

Earnings Per Share

76%

-84%

$0.11

$0.06

$0.72

With the 1% increase on the top line I'd expect the bottom line to exhibit the same characteristics but it didn't, the bottom line showed a horrendous drop from last year, but a raise from last quarter. I'd like to see why that was the case by diving into the income statement. We immediately see a 61% increase to GM Financial operating and other expenses, and a 14% increase to automotive selling, general and administrative expenses which made total costs and expenses increase 7%. After doing the math we see that operating income decreased a whopping 127% from last year! Automotive interest expense increased 64% while interest income decreased 68%, loss on extinguishment of debt decreased 100%, and equity income increased 22% which helped income increase a bit before taxes to show a drop of 98%. Income tax expenses decreased 134%, making net income show a 79% drop from the prior year. Net income attributable to noncontrolling interests decreased 135%, making net income attributable to stockholders show an 80% drop. After taking into consideration all the non-GAAP items we see a 84% drop in income attributable to shareholders, and 84% drop in earnings from last year.

Balance Sheet

Balance Sheet

Q/Q

2Q14

1Q14

Cash and cash equivalents

2%

$19,864

$19,426

Marketable securities

14%

$9,935

$8,716

Restricted cash and marketable securities

3%

$1,325

$1,288

Accounts and notes receivable, net

-2%

$11,480

$11,734

GM Financial receivables, net

5%

$15,797

$15,055

Inventories

2%

$15,200

$14,837

Equipment on operating leases, net

35%

$4,633

$3,432

Deferred Income taxes

9%

$11,499

$10,590

Other current assets

9%

$1,910

$1,747

Total current assets

6%

$91,643

$86,825

Restricted cash and marketable securities

7%

$969

$906

GM Financial receivables, net

4%

$15,430

$14,866

Equity in net assets of nonconsolidated affiliates

-14%

$7,485

$8,747

Property, net

2%

$27,023

$26,367

Goodwill

1%

$1,573

$1,563

Intangible assets, net

-4%

$5,220

$5,442

GM Financial equipment on operating leases, net

27%

$4,748

$3,726

Deferred Income taxes

-1%

$22,582

$22,840

Other assets

4%

$2,425

$2,324

Total assets

3%

$179,098

$173,606

Accounts payable

-3%

$26,992

$27,715

Short-term debt and current portion of long-term debt

6%

$15,803

$14,849

Accrued liabilities

11%

$29,552

$26,658

Total current liabilities

5%

$72,347

$69,222

Long-term debt

6%

$24,273

$22,918

Postretirement benefits other than pensions

0%

$5,826

$5,814

Pensions

-1%

$19,068

$19,171

Other liabilities and deferred income taxes

10%

$14,999

$13,641

Total liabilities

4%

$136,513

$130,766

After seeing the horrible numbers on the income statement I almost don't want to look at the balance sheet, but I have to. On the asset side of the equation there was a 14% increase to marketable securities and 35% increase to equipment on operating leases which helped increase the short-term assets on the balance sheet by 6%. As for the longer term assets there was a 14% drop in equity in net assets of nonconsolidated affiliates and 27% increase to GM Financial equipment on operating leases which helped total assets increase by 3% from last quarter.

On the debt side of the equation accrued liabilities increased 11% which made total current liabilities increase by 5%. After seeing a 10% increase to other liabilities and deferred income taxes there was a 4% increase to total liabilities.

Conclusion

The company saw non-GAAP earnings decrease by 84% thanks in part to an increase in total costs and expenses while the share price was up 4.59% between earnings calls. I definitely hate that earnings were down on a yearly basis. The results were mediocre to me, and other investors seem to think they were horrible as the stock dropped 4.46% after reporting while the S&P500 increased in value by 0.05%.

This was the quarter which the company took the impact of the special items; a $1.2 billion charge related to the recalls, and a $200 million restructuring cost. Earnings before taxes decreased dramatically which caused overall earnings to decrease dramatically. The free cash flow also decreased dramatically. North American earnings before taxes decreased. Europe earnings before taxes decreased, and South America earnings before taxes decreased. Possibly the only bright side is that International Operations increased. GM Financial pre-tax earnings were flat.

Another major disappointment is that North American margins were 9.3% versus a company expected 10% margin expectation. But the company still stands by its 10% margin expectations as they see the company generating higher sales prices; I sure hope the company isn't being stubborn with those predictions. Management also said they were going to cut production in Russia by 20% due to the turmoil taking place in the area.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long GM, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Auto Manufacturers - Major, Earnings
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