General Motors Co quarterly report, Q3 FY2011

General Motors Company: Q3 2011 Form 10-Q

Business context and reporting period. GM designs, manufactures and sells vehicles and parts worldwide and operates GM Financial, its automotive finance business. This unaudited filing covers the three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Unless otherwise noted, financial amounts are in U.S. dollars.

Financial performance

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Total net sales and revenue	$36.7 billion	$34.1 billion	$112.3 billion	$98.7 billion
Operating income	$1.8 billion	$1.7 billion	$5.2 billion	$4.8 billion
Net income attributable to stockholders	$2.1 billion	$2.2 billion	$8.5 billion	$4.8 billion
Basic earnings per common share	$1.10	$1.31	$4.67	$2.77
Automotive gross margin	$4.6 billion; 12.6% of automotive revenue	$4.5 billion; 13.1%	$14.1 billion; 12.6%	$13.0 billion; 13.1%

Q3 revenue rose 7.8%, chiefly on higher wholesale volumes, favorable currency translation and pricing, and GM Financial revenue. Higher costs and unfavorable vehicle mix tempered the benefit.
Nine-month revenue rose 13.8%. Net income attributable to stockholders increased 77.6%, but included a $1.6 billion gain on the New Delphi sale and a $0.3 billion gain on the sale of Ally Financial preferred stock.
Q3 segment results: GMNA EBIT was $2.2 billion; GME recorded a $292 million EBIT loss; GMIO EBIT was $365 million; GMSA recorded a $44 million EBIT loss; and GM Financial income before tax was $178 million. Nine-month GME and GMSA remained loss-making on an EBIT basis, at $580 million and $103 million, respectively.
GM Financial generated $391 million of Q3 revenue and $178 million of pretax income. Its reported effective yield on finance receivables was 14.9% for Q3 and 13.5% year to date.

Cash flow, balance sheet and liquidity

For the first nine months, operating cash flow was $6.7 billion, including $6.2 billion from Automotive and $530 million from GM Financial, versus $8.3 billion in 2010. Automotive cash flow was affected by working-capital use, including receivables and inventory.
Investing activities used $6.5 billion overall: Automotive used $5.0 billion and GM Financial used $1.5 billion. Automotive capital expenditures were $4.1 billion. Financing activities used $656 million overall.
At September 30, Automotive cash and cash equivalents were $20.3 billion and marketable securities were $11.7 billion. GM reported available liquidity of $32.0 billion, plus $5.9 billion available under credit facilities; a separate $983 million HCT escrow balance was restricted.
Total assets were $148.5 billion and total liabilities $102.9 billion. Automotive short- and long-term debt totaled $4.2 billion. GM Financial reported $6.9 billion of securitization notes and $553 million of credit-facility borrowings. Its $500 million 6.75% senior notes were issued in June.
Pension liabilities were $18.7 billion, down from $21.9 billion at year-end 2010. The reduction included a $1.9 billion stock contribution for accounting purposes; the shares had a $2.2 billion funding value when contributed.

Material changes and unusual items

GM’s nine-month results included the $1.6 billion New Delphi sale gain and $0.3 billion Ally preferred-stock sale gain. The Delphi sale generated $3.8 billion in proceeds; the Ally preferred-stock sale generated $1.0 billion.
Goodwill fell by $1.9 billion, including a $1.5 billion cumulative-effect adjustment to opening retained earnings following adoption of an accounting standard and a $395 million GME impairment charge. No goodwill impairment was recorded in Q3.
GM’s September 2011 UAW agreement provides lump-sum payments, changes to certain pension and benefit plans, and more than $2.0 billion of planned manufacturing investment over four years. A $5,000 payment per U.S. hourly employee was paid in October 2011.
The Canadian retiree healthcare trust settlement was implemented on October 31, 2011, after quarter-end. GM expected to record an approximately $800 million gain in Q4 2011; the settlement includes escrow funding and a CAD $800 million note, as well as additional scheduled payments.
GM acquired GM Financial in October 2010, so its revenue and earnings are included in 2011 but not in the reported 2010 comparison periods.

Outlook, risks and contingencies

Management expected Q4 2011 EBIT, excluding the anticipated HCT gain, to be similar to Q4 2010, citing North American seasonality and weakness in Europe. It expected full-year 2011 EBIT to improve solidly over 2010 but did not expect Europe to break even on an adjusted EBIT basis before restructuring charges.
GM cited risks from economic and market weakness, particularly in Europe; competition and pricing; commodity costs; supplier disruption; vehicle quality and recalls; financing availability; currency movements; and its ability to execute restructuring and new-technology investment.
GME goodwill remains sensitive to valuation assumptions, and further impairment could be material. GM also disclosed that Ally Financial common-stock carrying value exceeded estimated fair value at quarter-end; management judged the decline temporary but warned a prolonged decline could require impairment.
Contingencies include environmental remediation losses estimated at $150 million to $360 million, product and other litigation, and South American tax proceedings that could require escrow deposits of $530 million to $700 million. GM Korea labor claims had a $114 million recorded accrual; the stated high end of reasonably possible exposure exceeded that accrual by $452 million.
A UAW lawsuit seeks $450 million, and a Canadian dealer class action references a claim not exceeding CAD $750 million; GM said it had not accrued for these matters. GM also had a maximum potential $19.4 billion vehicle repurchase obligation to Ally Financial, subject to resale recovery and program terms.
GM’s corporate ratings remained below investment grade as of November 1, 2011, although several agencies had upgraded ratings during 2011. Management said current liquidity was sufficient for expected needs but identified pension and OPEB payments, capital spending, debt reduction, and potential tax-related escrow needs as cash demands.

Important facts for investors to verify

How much of the nine-month earnings increase reflects recurring operations versus the Delphi and Ally gains, tax benefits, and other nonrecurring items.
Whether European losses and weaker conditions worsen, and the implications for the stated Q4 and full-year outlook.
Automotive cash generation, working-capital trends, capital spending, and the accessibility of reported liquidity across jurisdictions.
GM Financial credit quality, loan-loss provisions, funding access, and the performance of securitized receivables.
Future pension funding requirements, HCT settlement accounting and payments, goodwill impairment assumptions, and material litigation or tax exposures.