General Motors Co quarterly report, Q1 FY2018

General Motors Company — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. GM designs, manufactures and sells vehicles and parts worldwide and provides automotive financing through GM Financial. European operations sold in 2017 are reported as discontinued operations; comparisons below generally reflect continuing operations.

Financial performance

Metric	Q1 2018	Q1 2017
Total net sales and revenue	$36.1 billion	$37.3 billion
Operating income	$529 million	$2.6 billion
Income from continuing operations	$1.11 billion	$2.69 billion
Net income attributable to stockholders	$1.05 billion	$2.61 billion
Diluted GAAP EPS	$0.72	$1.70
Adjusted diluted EPS	$1.43	$1.75
EBIT-adjusted	$2.61 billion	$3.55 billion

Revenue declined 3.1%. Operating income and GAAP earnings fell substantially; the quarter included $942 million of Korea restructuring charges, which GM excluded from adjusted results. GMNA EBIT-adjusted was $2.23 billion, with an 8.0% margin, versus $3.47 billion and 11.8% a year earlier. GM Financial adjusted pretax earnings rose to $443 million from $228 million. Equity income, primarily from China joint ventures, increased to $648 million from $555 million.

Cash flow: Consolidated operating cash flow from continuing operations was $448 million, down from $1.80 billion. Automotive operations used $1.2 billion of operating cash, compared with $1.1 billion provided a year earlier; capital expenditures were $2.3 billion. Adjusted automotive free cash flow was negative $3.5 billion versus negative $0.6 billion. GM Financial provided $1.7 billion of operating cash flow.

Liquidity and debt: At quarter-end, cash and cash equivalents were $14.3 billion and marketable securities were $7.1 billion. Automotive available liquidity was $31.3 billion, including $14.1 billion of undrawn credit capacity. Automotive debt was $15.3 billion; GM Financial debt was $83.5 billion. GM reported total liabilities of $183.3 billion. GM Financial’s available liquidity was $18.4 billion.

Material changes and unusual items

• GM adopted the new revenue standard (ASC 606) on January 1, 2018 using the modified retrospective method; prior-year comparisons were not restated. Adoption increased reported Q1 2018 automotive revenue by $1.13 billion and pretax income by $445 million compared with the amounts that would have been reported without adoption. The company said quarterly incentive timing shifts were expected to offset over 2018.
• GM recorded $900 million of Korea restructuring charges: $464 million of noncash asset impairments and $436 million of employee separation charges. It expected about $100 million of additional separation charges and approximately $800 million of cash outflows, primarily in Q2.
• Automotive wholesale sales were 1.159 million vehicles, down from 1.239 million. GM cited lower volumes and mix, higher material and freight costs, and Korea restructuring as pressures; GM Financial revenue benefited from a larger lease portfolio.
• In April, GM increased aggregate revolving-credit capacity from $14.5 billion to $16.5 billion. The filing also reports a $1.3 billion short-term borrowing from a China joint venture, due in June 2018.

Outlook, commentary and risks

• For 2018, GM forecast adjusted diluted EPS of $6.30–$6.60, compared with GAAP diluted EPS guidance of $5.52–$5.82. It expected Core EBIT-adjusted and Core adjusted automotive free cash flow to be in line with 2017 levels of $13.6 billion and $5.7 billion, respectively.
• GM expected GMNA to sustain an approximately 10% adjusted EBIT margin, assuming continued strength in U.S. industry sales, product launches and cost savings. Management cited a 10.0–11.0 million-unit U.S. industry breakeven range for GMNA.
• Management targeted $6.5 billion of annual operational and functional savings through 2018 versus 2014; approximately $5.7 billion had been achieved by quarter-end. It also cited a 20% or greater average adjusted return-on-invested-capital target.
• Management expected 5%–6% lower U.S. used-vehicle prices in 2018, reflecting rising off-lease supply. China outlook included low industry growth and continued pricing pressure.
• GM Korea’s labor agreement and viability plan depended on a definitive support agreement with the Korea Development Bank. The KDB had tentatively agreed to invest $750 million, subject to further negotiations; failure to finalize support could require further actions and adversely affect results.
• Key contingencies include possible Takata-related U.S. repair costs of about $1.0 billion (not accrued for the vehicles at issue), estimated reasonably possible GM Korea wage losses above accruals of approximately $950 million across specified claims, and up to $1.0 billion of reasonably possible excess losses on indirect-tax matters. A potential Brazilian tax recovery of up to $1.4 billion was not recorded and remained uncertain. GM also reported $941 million accrued for litigation-related and tax administrative matters.
• Other stated risks include recalls and litigation, emissions and regulatory requirements, restructuring execution, competition and incentives, commodity costs, foreign-exchange volatility, China joint-venture and market risks, and pension funding needs. GM said disclosure controls were effective at March 31, 2018.

Important facts for investors to verify

• How much of the year-over-year earnings decline reflects Korea restructuring, operating performance, and the ASC 606 accounting change; note that prior-year results were not restated for ASC 606.
• Whether GM Korea secures definitive KDB funding and completes its viability plan, and the resulting cash costs and operating impact.
• Progress toward 2018 adjusted EPS, Core EBIT and free-cash-flow outlook, including the assumptions for North American sales and used-vehicle values.
• Automotive cash generation, capital spending, liquidity and debt, distinguishing automotive obligations from GM Financial’s financing debt.
• Developments in Takata matters, Korea wage litigation, indirect-tax claims, and other recall or legal contingencies.