General Motors (NYSE:GM) on Wednesday reported a profit that beat Wall Street expectations, as strong sales of trucks and SUVs helped offset the costs of its massive recall campaigns.
GM's fourth-quarter net income rose to $1.1 billion, or $0.66 a share, up from $0.57 a share in the fourth quarter of 2013. Excluding special items, GM's profit of $1.19 a share was well ahead of the Wall Street consensus estimate of $0.83, as well as the $0.67 it earned on the same basis in the year-ago quarter.
For the full year, GM earned $4.25 billion before taxes.
A look under GM's hood, region by region
The best way to understand GM's earnings reports is to look at results for each of its major business units: the four regional units for its automotive business, plus GM Financial, the company's in-house financing arm.
Note that these results do not include the effects of taxes.
North America earned $2.2 billion in the fourth quarter, on what CEO Mary Barra described as "record average transaction prices" for a number of key products. GM North America benefited greatly from the company's much-improved pricing leverage, a direct result of its strong new products and much-improved discipline on incentives. It also benefited from a booming U.S. market for full-size pickups and big SUVs, segments where GM has fresh -- and very profitable -- entries. The unit's operating margin in the fourth quarter was 8.7%, down a bit from the 9.5% margin it posted in the third quarter but still strong.
For the full year, GM North America made $6.6 billion, down from $7.4 billion a year ago.
Europe is a longtime sore spot for GM, as its troubled Opel subsidiary has lost billions over the last decade. GM says that an end to those losses is in sight, but it hasn't arrived yet: GM Europe lost $393 million, a bit worse than the $395 million it lost in the year-ago quarter. The decline is more than explained by a deteriorating economic situation in Russia: CFO Chuck Stevens said that if Russia were excluded, GM Europe's results would have improved. GM's European market share stood at 6.3% in the quarter, down from 7.2% a year ago -- but that largely reflects GM's decision to stop selling low-cost (and low-profit) Chevrolet-branded models in the region.
For the full year, GM Europe lost $1.37 billion, up from $869 million a year ago.
International Operations includes the equity income from GM's massive joint ventures in China. The unit earned $396 million in the fourth quarter, a nice improvement over the $228 million it earned a year ago, largely due to $516 million in equity income from GM's joint ventures, reflecting an 8.7% operating margin. So why a loss from the rest? In part because of GM's ongoing heavy investments in new Asian factories -- and in part because of lower sales volumes outside of China.
For the full year, GM International Operations earned $1.2 billion, about equal to its 2013 result.
South America reported a fourth-quarter profit of $89 million, up from $27 million a year ago. The story here is pretty simple: Economic conditions in big regional markets like Brazil and Argentina are tough, and sales are down -- but GM has held the line on pricing, refusing to discount heavily to win sales. Its operating margin of 2.4% is not bad under the conditions -- rival Ford posted a significant loss in the region.
For the full year, GM South America lost $180 million, down from a profit of $327 million a year ago.
GM Financial earned $119 million in the fourth quarter, down from $225 million a year ago. Subprime sales penetration is down a bit, leasing is up a bit, credit losses were up slightly but not to alarming levels.
For the full year, GM Financial earned $803 million, down a bit from $898 million a year ago.
Special items, debt, and cash on hand
The quarter's key special item was a roughly $800 million charge related to the redemption of all of GM's outstanding Series A preferred shares. Those shares were held by a United Auto Workers trust created to pay benefits to retired GM workers. They paid a 9% quarterly dividend, a cost of about $348 million a year that GM was eager to retire.
GM's debt rose to $9.4 billion during the quarter, an increase of a little over $2 billion, a result of GM's decision to borrow at low rates in order to finance the redemption of the preferred shares. It's still a modest and manageable debt load, not a concern for shareholders.
On the other side of the ledger, GM had $25.2 billion in cash and another $12 billion in available credit lines at the end of 2014, for total available liquidity of $37.2 billion. That's a more than adequate rainy-day fund, something that Barra seemed to acknowledge when she indicated that GM will be raising its dividend in 2015.
The upshot: Better-than-expected results set GM up for improvements in 2015
Here's the guidance: GM expects its adjusted pre-tax earnings and margins to improve in all of its automotive regions in 2015, and Stevens confirmed that the company is on track with the 2016 and 2020 goals it announced in October.
GM's massive recall scandal was an expensive diversion in 2014, but the company's underlying story remains on track: Its products and critical North America margins have improved significantly, it's making big investments in new products and facilities around the world, and it remains on track to deliver significant long-term improvements to its business -- and its bottom line -- over the next few years.