General Motors' Operating Profit Drops Despite Revenue Gains

General Motors (NYSE: GM) said on Feb. 7 that its net income for the fourth quarter was $1.8 billion, down 71% from a year-ago result that included a $4 billion one-time gain from a tax accounting change.

GM's fourth-quarter revenue of $43.9 billion was up 10.8% from the year-ago period.For the full year, GM earned $9.4 billion in net income on record revenue of $166.4 billion.

GM earnings: The raw numbers

Data source: General Motors. GM's non-GAAP expression of "EBIT-adjusted" is essentially its operating income minus the effects of special items. "Automotive free cash flow" excludes effects related to GM's financial services unit.

Data source: General Motors.

Cadillac's global sales rose 22% in the fourth quarter, on strong demand for the XT5 crossover SUV. Image source: General Motors.

How GM's business units performed during the quarter

GM has vast worldwide operations, but it still generates the bulk of its profit in North America. GM North America earned $2.6 billion in EBIT-adjusted income in the fourth quarter, down 5.5% from a year ago. The unit's EBIT-adjusted profit margin of 8.4% was down from 10% a year ago.

New-product launch costs and a sales mix that included more of GM's recently launched sedan models (which carry lower profit margins than trucks and SUVs) were the principal reasons for the decline, mitigated somewhat by increased sales volumes and somewhat stronger pricing than a year ago.

For the full year, GM's EBIT-adjusted in North America was $12 billion, up 9.2% from a year ago, with a margin of 10.1%.

GM Europe lost $246 million before taxes in the fourth quarter, an improvement of $52 billion from a year ago. Sales and market share were roughly flat year over year, but revenue was down on exchange-rate effects related to the U.K.'s decision to exit the European Union.For the full year, GM Europe lost $257 billion on an EBIT-adjusted basis. CFO Chuck Stevens said that the unit would have broken even if not for the roughly $300 million impact of Brexit.

GM's international operations unit includes its vast operation in China. The unit generated $316 million in EBIT-adjusted income in the fourth quarter, down 22.5% from a year ago.

GM created the Baojun brand to compete with low-cost Chinese domestic automakers. Sales were up 26% in the fourth quarter. Image source: General Motors.

Equity income from GM's joint ventures with Chinese automakers totaled $525 million, down from $572 million a year ago. Strong retail sales in China were offset by pricing pressure at the lower end of the market. A sales slump in the Middle East, where GM typically sells a strong mix of trucks and SUVs, also hurt results.For the full year, GM international operations earned $1.1 billion in EBIT-adjusted income, down 19% from a year ago.

Like most automakers, GM is facing tough conditions in South America as major markets like Brazil and Argentina continue to deal with severe economic recessions. GM South America lost $65 million in the fourth quarter on an EBIT-adjusted basis, down $18 million from a year ago. Improvements in pricing were more than offset by unfavorable exchange-rate moves related to the Argentine peso.For the full year, GM South America lost $374 million on an EBIT-adjusted basis, an improvement of $248 million from a year ago.

GM Financial, the company's in-house financing arm, generated EBIT-adjusted of $193 million in the fourth quarter, up 16% from a year ago. The unit's charge-off rate, a measure of credit losses, was stable year over year at 2.2%.For the full year, GM Financial earned $913 million on an EBIT-adjusted basis, up 9.1% from a year ago.

Cash flow, debt, and total liquidity

GM generated $1.7 billion in adjusted automotive free cash flow in the quarter, up $2 billion from a year ago. Full-year adjusted automotive free cash flow of $6.9 billion was up $4.7 billion from a year ago, on higher profits, lower recall-related costs, and a lower proportion of sales to rental-car fleets. That was partially offset by an increase in capital expenditures related to future-product development, which totaled $9.4 billion in 2016 versus $7.8 billion in 2015.

As of Dec. 31, GM had cash of $21.6 billion and additional available credit lines of $14 billion, for $35.6 billion in total liquidity available to its automotive business. GM targets a cash balance of about $20 billion on an ongoing basis.

Against that, GM had $10.8 billion in well-structured long-term debt as of Dec. 31, up from $8.8 billion a year ago.

Looking ahead: GM's guidance for 2017

GM first presented its full-year guidance for 2017 in January, and it remains unchanged. The company expects full-year earnings per share to be between $6.00 and $6.50, with revenue, EBIT-adjusted, and EBIT-adjusted margin all equal to or better than its full-year 2016 results. It expects adjusted automotive free cash flow of about $6 billion.

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John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.