GM Earns Record Net Income While Fixing Opel Will Take Longer

General Motors Co. (GM) earned $9.19 billion last year, the largest annual profit in its 103-year- history, while saying it may take months to craft a plan to stop European losses.

Fourth-quarter net income attributable to stockholders slid 48 percent to $725 million, the lowest in two years. GM, which regained the global auto sales lead last year, had earned more than $2 billion in each of the three previous quarters. Profit in the fourth quarter fell 25 percent to 39 cents a share, trailing the 41-cent average estimate of 17 analysts surveyed by Bloomberg.

“Overall we posted a solid performance for the year and showed steady progress toward a sustained, long-term strong financial performance,” Chief Executive Officer Dan Akerson told analysts today. “Obviously, we still have a lot of work to do in some areas and we’re taking the necessary corrective actions to get the ball over the goal line.”

GM North America earnings before interest and taxes more than tripled for the year to $7.19 billion on improved U.S. sales, the Detroit-based company said today in a statement. The automaker’s Europe business, including the Opel brand, lost $747 million for the year. While that’s better than Europe’s restated $1.95 billion loss in 2010, it’s not break-even as GM had planned until November.

“GM’s results in Europe certainly dampen the positive results in the U.S. but you have to still say they had a really good year,” Rebecca Lindland, an industry analyst with IHS Automotive, said before the results were released. Before a government-backed bankruptcy in 2009, “they were making record losses, so they’ve made a tremendous amount of progress.”

Top-Selling Automaker

GM global sales rose 7.6 percent last year to 9.03 million to outsell Toyota Motor Corp. (7203) as the world’s top-selling automaker. GM lost the sales crown in 2008 to Toyota. The shares gained 9 percent to $27.17 at the close in New York.

“For 2012, we expect the global industry to continue to rebound and we anticipate being able to grow the top-line,” Akerson said on a conference call today.

The automaker said it plans to spend $8 billion on capital expenditures this year as it invests in new products, an increase over last year’s $6.2 billion.

“What we’re doing is really building back up from some very depressed capital spending levels in the 2008 and 2009 time frame,” Ammann said. “There’s a little bit of catch up going on.”

GM’s full-year profit in 2010 of $6.17 billion had been the automaker’s largest annual income since its predecessor earned $6.7 billion in 1997, excluding profit in 2009 to account for its post-bankruptcy recapitalization. After $1.6 billion in dividends and other costs related to preferred stock, GM reported a 2011 profit of $7.59 billion attributable to common stockholders.

‘Work to Do’

“This in my mind for the next couple years is a true growth story with some hiccups along the way in Europe, but tell me anyone who’s not facing issues in Europe,” Sarat Sethi, a New York-based portfolio manager at Douglas C. Lane & Associates, said in a Bloomberg Television interview.

“We clearly have work to do in Europe,” Chief Financial Officer Dan Ammann told reporters at GM’s headquarters in Detroit. “We have work to do in the South America business. Frankly we have work to do all around the company in terms of cost opportunities.”

GM said it will pay profit-sharing bonuses of as much as $7,000 to 47,500 eligible UAW members under a formula negotiated last year as part of a four-year labor contract. A year ago, the automaker paid a record $4,300 on average to U.S. union workers. U.S. salaried workers’ bonus payout will decrease to 86 percent of the target for 2011 from 145 percent a year earlier, Katie McBride, a GM spokeswoman, said in a phone interview.

No Forecast

U.S. salaried workers will get their bonuses on Feb. 29 and UAW workers will get their profit sharing checks on March 2, McBride said.

Akerson wants to reduce costs to improve GM’s EBIT margin, which lags behind that of Ford Motor Co. (F), Volkswagen AG (VOW) and Hyundai Motor Co.

While GM didn’t give a forecast for the year, the automaker did say it expects its global market share to be little changed compared with 2011 and sales volumes to increase along with pricing.

GM’s EBIT margin improved to 5.5 percent last year from 5.2 percent in 2010, CFO Ammann told reporters today on a conference call.

“We’re very focused on improving our margins,” he said. “Not just this coming year, but over the next few years to get them to world-class levels.”

U.S. ‘Turnaround’

Revenue in the fourth quarter increased to $38 billion from $36.9 billion a year earlier, the company said. For 2011, revenue increased to $150.3 billion from $135.6 billion.

GM boosted U.S. sales last year by 13 percent while reducing incentive spending per vehicle by 5.1 percent to $3,223, according to researcher Autodata Corp., based in Woodcliff Lake, New Jersey.

“You’ve got a great turnaround going on in the United States that’ll continue to get better, especially in 2013,” David Whiston, an analyst with Morningstar Inc. in Chicago, said. “I’ve been telling clients 2012, still think of it as a transition year for the new GM to get totally up to speed, because they still have holes in their product lineup, most notably full-size pickups.”

Problems in Europe

In Europe, where GM hasn’t recorded an annual profit for more than a decade, the average of the industry analysts’ estimates was for the fourth-quarter loss to increase to $358 million from a deficit of $292 million in the third quarter.

GM Europe lost $562 million in the fourth quarter, little changed from a loss of $568 million a year earlier. Last quarter’s loss included about $200 million in restructuring costs that weren’t reflected in the estimates.

“The industry is over capacity,” Ammann said of Europe. GM is working on “the pieces of our business that we can control, working with all of our partners to get to the right answer overall.”

CEO Akerson said GM must match capacity to demand. “We are looking at everything in order to achieve a better break-even point, a lower break-even point, and scale,” he said. “There’s more to come on this, I think, in the next couple of months.”

GM, to improve capacity utilization in Europe, should reconsider plans to import Opel and Vauxhall vehicles to the region, Wolfgang Schaefer-Klug, chairman of the German Group Works Council, said today in a statement.

“The expansion and refreshment of the Opel product line up offers a good starting point,” Schaefer-Klug said.

Ammann declined to say whether Europe will break even this year.

‘Drives Me Crazy’

“The thing about Europe that drives me crazy is I just don’t see it getting better anytime soon,” Whiston said. “You either need sales to pick up really, really strong. Or you need to fire a lot of people and close plants.”

GM’s international operations, which include China, earned $373 million in the fourth quarter while the South America business lost $225 million, the company said.

While GM shares have risen 34 percent this year, they remain below the $33 level of the automaker’s 2010 initial public offering. With a market capitalization of $42.5 billion, GM traded at 6.9 times earnings, almost half the 14 times earnings that investors pay for the S&P 500 Index.

The U.S. Treasury Department sold 28 percent of GM in the IPO, and it still holds 32 percent of the Detroit automaker’s shares, acquired as part of the Obama administration’s $50 billion bailout. The U.S. wants to sell for at least the IPO price, people familiar with the matter have said.

Uncertainty Ahead

“GM is caught between what they don’t know and what they should not promise,” Adam Jonas, an industry analyst with Morgan Stanley, wrote in a note to investors yesterday.

While Ford is targeting a little changed profit for this year with improvements in North America, he said, “GM would have a difficult time promising the same given the restructuring efforts in Europe, the disruption of the truck changeover and pension headwinds.”

GM’s global pension plans were underfunded by $24.5 billion, an increase from $22.2 billion at the end of 2010, the company said today.

The company decreased the discount rate it uses to calculate the present value of future cash flows, which hurt the funded status by $8.4 billion.

Shift to 401(k)s

The pension plans achieved 11 percent asset returns, exceeding the company’s 8 percent target. Pension expense in 2012 will be “unfavorable” because GM is lowering its expectation for returns to 6.2 percent as it allocates more assets to fixed-income investments, Ammann said.

Cindy Brinkley, GM vice president for global human resources, yesterday said 19,000 U.S. salaried workers who were hired prior to 2001 were being moved from defined benefit pension plans to defined contribution 401(k)s on Oct. 1.

Those workers will stop accruing fixed retirement benefits on Sept. 30 and begin receiving defined contributions to 401(k) programs, she said.

U.S. salaried workers won’t get across-the-board salary increases this year while the automaker will offer bonuses, Brinkley said in a conference call with reporters. GM’s U.S. salaried workers haven’t had an across the board pay increase since February 2010.

GM is considering initiatives beyond the changes it made to salaried workers’ pension plans to improve the funded status, Ammann said today.

To contact the reporters on this story: Tim Higgins in Detroit at thiggins21@bloomberg.net; Craig Trudell in Southfield, Michigan at ctrudell1@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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