General Motors Co annual report, FY2011

General Motors Company — 2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011; includes unaudited fourth-quarter results. Filed February 27, 2012. GM reports automotive operations across North America, Europe, International Operations and South America, plus GM Financial. Comparisons below are primarily with 2010, when GM Financial was consolidated for only three months; 2011 comparisons therefore include a full year of its results.

Financial results and key metrics

Metric	2011	2010
Total net sales and revenue	$150.276 billion	$135.592 billion
Operating income	$5.656 billion	$5.108 billion
Net income	$9.287 billion	$6.503 billion
Net income attributable to stockholders	$9.190 billion	$6.172 billion
Net income attributable to common stockholders	$7.585 billion	$4.668 billion
Basic / diluted EPS	$4.94 / $4.58	$3.11 / $2.89
Automotive EBIT-adjusted (non-GAAP)	$7.682 billion	$6.901 billion
Operating cash flow, consolidated	$8.166 billion	$6.780 billion
Automotive free cash flow (operating cash flow less capital expenditures; non-GAAP)	$1.188 billion	$2.389 billion

Revenue rose 10.8%, reflecting higher wholesale volumes, favorable pricing and foreign exchange, and GM Financial’s full-year contribution. Automotive gross margin was $18.480 billion, approximately 12.4% of automotive revenue, versus $16.543 billion, approximately 12.2%, in 2010. Operating income margin was approximately 3.8% in both years. Earnings included material gains and charges described below; GAAP net income should not be read as solely recurring operating performance.

Worldwide vehicle sales increased to 9.026 million from 8.385 million, and worldwide market share rose to 11.9% from 11.5%. China joint ventures contributed $1.511 billion of equity income, up from $1.297 billion. By segment, 2011 EBIT-adjusted was GMNA $7.194 billion, GME loss $747 million, GMIO $1.897 billion and GMSA loss $122 million. GME losses narrowed year over year, while GMIO and GMSA results declined.

Fourth quarter: Revenue was $37.990 billion and net income was $747 million; net income attributable to stockholders was $725 million. Basic and diluted EPS were $0.30 and $0.28, respectively. Fourth-quarter results included $891 million of goodwill impairments, a $749 million Canadian retiree-healthcare settlement gain, a $555 million impairment of Ally Financial common stock, and a $502 million Australian deferred-tax valuation-allowance reversal.

Liquidity, debt and balance sheet

At year-end, automotive cash and cash equivalents were $15.499 billion and marketable securities were $16.148 billion, for available liquidity of $31.647 billion. A further $5.867 billion was available under credit facilities; total available liquidity was $37.514 billion.
Automotive debt was $5.295 billion, up from $4.630 billion. GM Financial debt was $8.538 billion, principally securitization notes. These borrowings serve different businesses and should not be viewed as equivalent in funding or recourse.
Total assets were $144.603 billion, total liabilities $105.612 billion, and total equity $38.991 billion. Automotive current liabilities were $48.932 billion; a conventional consolidated current ratio is not presented because GM Financial reports on a non-classified basis.
Automotive capital expenditures were $6.241 billion, up from $4.200 billion. Cash from operations increased, but automotive free cash flow fell as capital spending rose and working capital was less favorable.
Defined-benefit pension plans were underfunded by $25.4 billion, up from $22.2 billion. GM made $2.798 billion of pension contributions in 2011 and had no required U.S. qualified-plan contributions in 2012; expected 2012 contributions were $100 million to U.S. non-qualified plans and $740 million to non-U.S. plans.
No common-stock dividend was planned. GM paid $864 million in Series A and Series B preferred dividends in 2011.

Material changes and unusual items

2011 net income attributable to stockholders increased to $9.190 billion from $6.172 billion. The year included a $1.645 billion gain on the New Delphi sale, a $749 million healthcare settlement gain, and $1.286 billion of goodwill impairment charges. It also included a $555 million Ally Financial common-stock impairment and a $339 million gain on sale of Ally preferred stock.
The $1.645 billion New Delphi disposal gain and stronger China JV income were significant contributors to the increase in equity income. GM sold its New Delphi interests for $3.8 billion in March 2011.
GM Financial revenue was $1.410 billion and income before taxes was $622 million in 2011, compared with $281 million and $129 million, respectively, for the three months consolidated in 2010. Its finance receivables were $9.162 billion; delinquencies over 30 days were 7.2% of contractual amounts due, down from 8.6%.
GM’s cash and securities mix shifted: cash declined from $21.061 billion to $15.499 billion, while marketable securities increased from $5.555 billion to $16.148 billion. Asset-sale proceeds and operating cash flow supported liquidity.
In 2011 GM recorded $1.466 billion of goodwill impairment as a cumulative-effect adjustment to opening retained earnings on adopting revised accounting guidance, in addition to $1.286 billion of impairment charges in the income statement. Europe’s weak outlook and risks in GM Korea were important impairment factors.

Outlook, management commentary and risks

Management said it expected liquidity and operating cash flow to support business needs, including investment in products, engineering and technology, pension and other benefit payments, debt reduction and preferred dividends. The filing gives no clear numerical 2012 revenue or earnings guidance. GM planned to continue competitive pricing and use incentives as needed, and to invest substantially in hybrid and electric-vehicle offerings and advanced propulsion technologies. Management estimated 2012 GMNA pension income would decline by about $0.8 billion, primarily due to lower expected returns on U.S. plan assets.

Key operating risks include cyclical vehicle demand, economic and credit conditions, intense price competition, commodity and fuel-price volatility, supply interruptions, and the ability to launch vehicles customers want at profitable prices.
Europe remained loss-making; management was restructuring operations and expected a further $100 million of costs, primarily in 2012, to complete specified European programs. GM also faced substantial regulatory requirements for emissions, fuel economy and vehicle safety.
GM identified significant pension exposure: lower discount rates and weaker asset returns can increase liabilities, expense and funding needs. The expected return assumptions for U.S. pension assets were reduced for 2012.
Potential legal and contingency exposures include Korean wage litigation: the company accrued $113 million, while the reasonably possible exposure above that accrual was estimated at $523 million. Other disclosed matters include a $450 million UAW claim, Canadian dealer litigation with no accrual, and South American tax proceedings that could require $530 million to $730 million in escrow deposits.
Environmental liabilities accrued were $169 million; the filing estimates remediation losses could range from $140 million to $310 million. Separately, the maximum potential repurchase obligation for Ally-financed dealer inventory was estimated at $19.779 billion, though the reported guarantee fair value was $17 million and resale of vehicles could reduce exposure.
The U.S. Treasury owned 31.9% of GM’s common stock as of February 15, 2012. Certain government-related covenants and executive-compensation restrictions remained in effect despite repayment of government loans. Pension liabilities, goodwill impairment, foreign exchange, joint ventures and GM Financial’s access to securitization and credit funding also warrant attention.

Deloitte issued an unqualified opinion on the 2011 financial statements and concluded internal control over financial reporting was effective at December 31, 2011. The auditor noted the adoption of revised goodwill accounting standards; the filing also explains that fresh-start reporting after the 2009 bankruptcy sale makes comparisons with Old GM periods before July 10, 2009 not comparable.

Important facts for investors to verify

How much of 2011 earnings and year-over-year growth came from disposal gains, the healthcare settlement, tax-allowance reversals and other non-recurring items versus ongoing automotive operations.
Whether automotive free cash flow can recover as capital expenditures rise, and how working capital, production and dealer financing affect cash generation.
Whether European restructuring improves GME profitability, and whether further impairment charges arise in Europe or GM Korea.
The assumptions behind the $25.4 billion pension underfunding, future contributions and the expected reduction in pension income.
The progress and potential outcomes of Korean labor, UAW, Canadian dealer and South American tax matters, including related accruals and escrow requirements.
GM Financial’s credit performance, securitization access, funding costs and lease residual values, alongside the distinction between its debt and automotive debt.
Potential dilution from warrants and Series B preferred conversion, and the implications of government ownership and continuing covenants.