Good news or bad news? For General Motors (NYSE: GM), the fourth quarter brought a bit of both.
While the auto giant said on Thursday that its net income for the quarter was just $725 million, the lowest in two years, that was still enough to make 2011 the single most profitable year in GM's 103-year history.
In a way, that frames GM's situation nicely: Some things are working really well, and some things still need work. Fortunately, that work appears to be getting done.
Strong profits, big challenges
GM's profit for the quarter wasn't great -- just $0.39 a share, below the average of $0.41 expected by analysts and down significantly from year-ago totals. But as the strong full-year results reflect, GM still had some good news to report.
The good news is indeed good, and we shouldn't lose sight of it: GM's recent new products, particularly the Chevy Cruze compact and its smaller sibling, the Sonic, are competing very well and gaining share in markets all around the world. In just over a year, GM has already sold more than a million Cruzes, CEO Dan Akerson said on Thursday. Meanwhile, the Sonic has "handily" outsold the acclaimed Ford (NYSE: F) Fiesta in its three months on the market, he said.
That success has been a key part of the strong results seen in the U.S. and Asia, which were helped also by the problems faced by Toyota (NYSE: TM) and Honda (NYSE: HMC) in 2011. Elsewhere in the world, however, challenges for GM remain.
North America
The home front continued to be the primary driver of GM's profits, contributing $1.5 billion in pretax earnings to GM's bottom line during the quarter on revenues of $23.1 billion. Revenues were up over a billion dollars from year-ago figures, thanks to higher sales volumes and improved pricing power, but they were offset somewhat by a less-favorable "mix" than seen in the fourth quarter of 2010. "Mix" is shorthand for the ratio of (lower-profit) small vehicles to (higher-profit) larger ones. As CFO Dan Ammann pointed out, the Chevy Sonic and compact Buick Verano didn't exist a year ago, and GM saw solid sales of both during the quarter.
International Operations
That's GM's shorthand for "Asia, Australia, and elsewhere", and the catch-all region earned about $400 million before taxes, a $100 million improvement over year-ago totals. As in North America, increased sales volumes and pricing power helped, offset again by "mix" -- reflecting a global trend toward smaller vehicles -- and increased costs. GM's Chinese joint ventures continued to show solid results, and Akerson noted that the company's sales in Russia were up 53% in 2011.
South America
GM's Latin American branch posted a pretax loss of about $200 million, about half of which was a restructuring charge. GM South America has struggled recently, but Akerson and Ammann noted that things are starting to head in the right direction.
The company is in the process of aggressively refreshing its somewhat dated product portfolio in the region -- the Cruze was launched last year to considerable acclaim, and five more new products are due in 2012 -- and "executing stringent cost-control measures," to use Akerson's somewhat grim phrase. Nutshell summary: GM has a plan, the plan is underway, and things should be considerably improved a year from now.
Europe
This was ugly, as was widely expected. GM Europe, which includes troubled subsidiary Adam Opel AG as well as separate sales operations for the Chevrolet and Cadillac brands, posted a loss of roughly $600 million, about a third of which was restructuring charges. That made for a loss of $747 million for the full year, an improvement over 2010 -- but far from GM's goal of breaking even in 2011.
The troubles here are not new, and recent developments have made it clear that Akerson plans to take decisive action -- but while both he and Ammann were blunt, calling Europe's results "simply unacceptable," GM isn't ready to announce its plan for overhauling the operation.
Ammann did make it clear that all stakeholders -- the unions, individual governments -- have agreed that GM's European operations need to be sustainably profitable, and that major changes will be necessary to make that happen. The two key takeaways: GM isn't counting on an improving economy to save them -- Europe should be profitable now -- and management intends to share its overhaul plan "soon."
One more challenge: A $24.5 billion problem
As promised, Ammann gave an update on GM's global pension situation. The General's pension plans were underfunded by $24.5 billion as of year-end, up slightly from year-ago numbers because the company has reduced its projections of future investment returns despite strong investment returns during 2011.
As I've noted before, this liability won't be an urgent concern for a couple of years yet, but GM is already taking steps to "de-risk" its pension funds, most recently announcing that 19,000 salaried workers would stop accruing pension benefits later this year and begin receiving 401(k) contributions from the company instead.
The upshot: No surprises, but lots to do
General Motors is in much better health than it was even a couple of years ago, and I continue to believe that current management is doing a good job of sorting out the General's remaining issues. Europe is a mess, and a big drain on both GM's cash and management's attention, but Akerson and Ammann were at pains to emphasize that decisive action is on the way.
Meanwhile, the pension obligation remains a worry, but not (yet) a catastrophic one. GM had $31.6 billion in cash on hand as of year-end, a solid increase over the year-ago total and more than enough to cover the present shortfall – though it's unlikely that such a sizeable contribution will be necessary. But still, more action on this front will be necessary, though Ammann and his team have a couple of years to sort it out.
Long story short: GM's still a work in progress. That's not news – but what is good news is that after many years of neglect, the work finally appears to be getting done. Stay tuned.
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