General Motors Co quarterly report, Q2 FY2016

General Motors Company — Q2 2016 Form 10-Q

Reporting period: Three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods unless otherwise noted. GM designs, manufactures and sells vehicles and parts globally and provides automotive financing through GM Financial. Dollar amounts are in U.S. dollars.

Financial performance

Metric	Q2 2016	Q2 2015	H1 2016	H1 2015
Net sales and revenue	$42.4 billion	$38.2 billion	$79.6 billion	$73.9 billion
Operating income	$3.0 billion	$1.3 billion	$5.0 billion	$2.0 billion
Net income attributable to common stockholders	$2.9 billion	$1.1 billion	$4.8 billion	$2.1 billion
Diluted GAAP EPS	$1.81	$0.67	$3.05	$1.23
Management-adjusted diluted EPS	$1.86	$1.29	$3.12	$2.15

Q2 revenue increased 11.0%; H1 revenue increased 7.8%. Higher North American vehicle volumes and pricing, and growth in GM Financial, were important contributors. H1 automotive revenue rose 6.0%; GM Financial revenue rose 52.3%.
Q2 results included $660 million of equity income from nonconsolidated affiliates, including $471 million from China joint ventures. H1 equity income was $1.2 billion, including $989 million from China joint ventures.
GMNA adjusted EBIT was $3.65 billion in Q2 (12.1% margin) and $5.94 billion in H1 (10.5% margin). GME returned to positive adjusted EBIT: $137 million in Q2 and $131 million in H1. GMIO adjusted EBIT was $169 million in Q2 and $548 million in H1; GMSA reported losses of $121 million and $188 million, respectively.
GM Financial’s adjusted pretax income was $266 million in Q2 and $491 million in H1. Its H1 adjusted pretax margin declined to 11.2% from 15.3%, despite higher revenue, as the larger lease portfolio also increased expenses.

Cash flow, balance sheet and liquidity

H1 consolidated operating cash flow was $6.0 billion, investing cash outflow was $12.4 billion, and financing cash inflow was $10.1 billion. Cash and cash equivalents ended June at $18.9 billion, versus $15.2 billion at year-end 2015.
Automotive H1 operating cash flow was $4.3 billion, compared with $5.1 billion a year earlier; capital expenditures were $4.6 billion. Adjusted automotive free cash flow was $1.7 billion in both periods, after adding back $2.0 billion of discretionary pension contributions in 2016.
Automotive available liquidity was $34.1 billion, including $20.1 billion of cash and marketable securities and $14.0 billion available under credit facilities. GM Financial separately reported $14.4 billion of available liquidity.
At June 30, total debt comprised $10.8 billion of automotive debt and $64.5 billion of GM Financial debt. GM Financial debt primarily funds its receivables and leased-vehicle portfolio. Automotive debt increased from $8.8 billion at year-end 2015; GM Financial debt increased from $54.3 billion.
Total assets were $210.4 billion and total equity was $44.0 billion. Pension liabilities were $17.9 billion; GM made $2.0 billion of discretionary contributions to its U.S. hourly pension plan during H1, funded with proceeds from $2.0 billion of new automotive notes.
The company increased its revolving-credit capacity to $14.5 billion. The facilities require minimum global liquidity of $4.0 billion and U.S. liquidity of $2.0 billion; GM reported no borrowings against the primary facilities.

Changes, outlook and management commentary

GM raised its 2016 adjusted diluted EPS outlook to $5.50–$6.00, implying GAAP diluted EPS of $5.43–$5.93 after stated adjustments. Management expected improved full-year adjusted EBIT and margins.
Other stated targets include 9%–10% adjusted EBIT margins by early next decade, $5.5 billion of annual operational and functional cost savings by 2018 versus 2014, average annual adjusted automotive free cash flow of approximately $6–$7 billion for 2016–2018, and continued consolidated ROIC above 20%.
GM expects approximately 10% GMNA adjusted EBIT margin in 2016, supported by U.S. industry sales, cost performance and new products. It estimates GMNA’s U.S. industry break-even level at 10.0–11.0 million units.
Management said the U.K. referendum result could affect second-half 2016 results by up to $0.4 billion if post-referendum conditions persist. In China, management anticipated moderate industry growth and pricing pressure of approximately 5% in 2016. South American economic weakness and currency volatility remained significant headwinds.
Capital returns continued under an expanded repurchase authorization of up to $9 billion through 2017; GM reported $3.8 billion of cumulative purchases through July 19, 2016. The quarterly dividend was raised to $0.38 per share in Q1 2016.
GM acquired Cruise Automation for $581 million in May, including $291 million cash and approximately $290 million in stock. It also invested $500 million in Lyft. GM reported $490 million of acquisition goodwill for Cruise.

Risks, contingencies and unusual items

Ignition-switch and other recall litigation and investigations remain material uncertainties. Accrued litigation-related liabilities were $1.3 billion. GM said additional liabilities were probable for at least some remaining matters but it could not estimate an overall loss range. The Second Circuit’s July 13, 2016 ruling limited enforcement of the 2009 bankruptcy-sale order for certain claims; GM stated it intended to appeal. The court also issued a partly favorable July 15 ruling on economic-loss claims.
GM had paid a $900 million penalty under a Deferred Prosecution Agreement and agreed to an independent monitor and other obligations. A $300 million shareholder class-action settlement was approved in May 2016; an appeal was filed by one shareholder.
GM reported no provision for possible Takata-related repairs. It estimated potential costs of up to $320 million for 2.5 million vehicles under review and an additional $550 million for up to 4.3 million vehicles potentially covered by future reports. GM believed testing would show repairs were unnecessary; a determination was expected by September 2016 for the initial group.
GM estimated reasonably possible losses above accruals of up to $900 million for indirect tax matters. Separately, it estimated up to $513 million of possible additional exposure in GM Korea wage litigation. Certain South American tax matters could require $500–$600 million in escrow deposits.
Maximum undiscounted exposure under certain guarantees was $4.2 billion, against a recorded liability of $68 million. GM stated that recoveries, resale value or other offsets may reduce actual exposure.
Emissions inquiries in Germany could lead to further testing, costs, penalties, reputational effects or recalls. GM also cited risks from labor negotiations, foreign-exchange and economic conditions, vehicle quality and recalls, pension assumptions, financing availability, and execution of restructuring plans.
GM’s 2016 pension discount-rate methodology reduced service and interest costs by $194 million in Q2 and $385 million in H1; the company said the effect would be offset in actuarial gains and losses at the next plan remeasurement.

Investor verification priorities

Confirm the assumptions and reconciliation behind the $5.50–$6.00 adjusted EPS outlook and the stated cash-flow targets.
Track U.S. vehicle mix, fleet and rental sales, pricing, and GMNA margins, as well as GM’s global market-share changes.
Monitor GM Financial portfolio growth, subprime exposure, delinquency trends, loan-loss allowances, lease residual values and debt funding.
Follow developments in recall, ignition-switch, Takata, emissions, GM Korea wage and indirect-tax matters, including possible losses beyond recorded accruals.
Assess cash generation after capital spending, pension contributions, dividends and repurchases; distinguish automotive liquidity from GM Financial liquidity.
Evaluate whether China joint-venture income and the European recovery remain durable amid pricing pressure, Brexit-related uncertainty and regional economic risks.