General Motors Co. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; filed August 3, 2012. Unaudited results cover GM’s automotive operations and GM Financial. Amounts below are U.S. dollars unless stated otherwise.
Business context and financial performance
GM designs, manufactures and sells vehicles and parts globally, and provides automotive financing through GM Financial. Its reporting segments are GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), GM South America (GMSA) and GM Financial. China joint-venture sales are not consolidated; GM’s share of their earnings is reported as equity income.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $37.6B | $39.4B | $75.4B | $75.6B |
| Operating income | $1.821B | $2.451B | $2.817B | $3.400B |
| Net income | $1.901B | $3.037B | $3.251B | $6.448B |
| Net income attributable to stockholders | $1.846B | $2.992B | $3.161B | $6.358B |
| Diluted EPS | $0.90 | $1.54 | $1.49 | $3.27 |
| Operating cash flow | Not separately stated for the quarter | $6.441B | $4.687B |
- Q2 automotive gross margin was $4.449B, down 15.3% year over year; as a share of automotive sales, it was approximately 12.0% versus 13.4%.
- Automotive free cash flow, defined by GM as operating cash flow less capital expenditures, was $1.980B for the first half, versus $1.871B. Automotive operating cash flow was $6.032B and capital expenditures were $4.052B.
- At June 30, cash and cash equivalents were $22.184B and current marketable securities were $11.381B. GM reported automotive available liquidity of $32.613B, plus $5.843B available under credit facilities. GM Financial separately reported available liquidity of $1.843B.
- Automotive debt was $5.143B and GM Financial debt was $9.650B, or $14.793B combined. Combined debt was approximately $13.833B at December 31, 2011. GM reported total liabilities of $110.377B and total equity of $41.610B at June 30.
Material changes versus comparable periods
- Q2 revenue fell 4.5%, primarily from unfavorable currency effects and lower wholesale volumes, partly offset by favorable vehicle mix and pricing. First-half revenue was nearly flat.
- Q2 operating income and net income declined year over year. GMNA remained profitable, but its adjusted EBIT was down 12.6% to $1.965B. GME recorded an adjusted EBIT loss of $361M, compared with $102M of adjusted EBIT a year earlier. GMIO adjusted EBIT was $557M; GMSA recorded an adjusted EBIT loss of $19M.
- GM Financial revenue rose 47.6% to $487M in Q2 and pretax income rose 50.7% to $217M, reflecting portfolio growth, partly offset by higher interest expense, vehicle costs and loan-loss provisions.
- First-half 2012 results included $617M of goodwill impairment charges, mainly $590M in GME and $27M in GMIO. First-half 2011 equity income included a $1.6B gain on the sale of New Delphi interests, which did not recur; this materially affects the year-over-year net-income comparison. China JV equity income also declined.
- Operating cash flow increased $1.754B year over year, with management citing improved working capital and pension/OPEB-related items. Capital expenditures increased to $4.059B from $2.498B.
Outlook, management commentary, risks and unusual items
- Management expected the average of GMNA’s Q2 and Q3 results to approximate Q1 results. For Europe, GM expected adverse conditions to persist through the rest of 2012 and substantial regional losses; the success of its restructuring depended partly on external conditions.
- GM expected $2.5B–$3.5B of pretax special charges in the second half of 2012 from settling U.S. salaried pension obligations, with a projected $3.5B–$4.5B of additional plan funding. GM estimated the transactions would reduce annual earnings by about $200M through lower pension income. These are estimates and could change with interest rates, asset returns and lump-sum elections.
- GM entered a strategic alliance with Peugeot S.A. and acquired a 7% stake for approximately $0.4B. The PSA investment’s carrying value exceeded fair value at June 30; GM considered the decline temporary but warned a prolonged downturn could lead to impairment.
- Risks include Europe’s economic and industry weakness, currency movements, market-share and pricing pressure, pension funding and settlement costs, potential future goodwill impairments, tax and legal proceedings, and availability of financing for customers, dealers and suppliers. Venezuela’s exchange controls delayed approval for settlement of BsF-denominated amounts; $751M equivalent was pending government approval at June 30.
- Recorded liabilities included $168M for environmental matters, $574M for product liability and $1.221B for other litigation-related and tax administrative matters. GM disclosed additional possible exposures, including a $556M reasonably possible exposure above the accrual for GM Korea wage claims and a $450M UAW claim for which no accrual was recorded. Outcomes may exceed recorded reserves.
- GM stated that available liquidity and operating cash flow were expected to cover liquidity needs, while identifying substantial planned uses including investment, pension funding, debt reduction and preferred dividends. Certain South American tax proceedings could require escrow deposits or payments of up to $0.9B.
Important facts for investors to verify
- Whether European losses, restructuring actions and any further impairment charges develop in line with management’s outlook.
- The final cost, funding requirement, accounting charges and completion timing of the U.S. salaried pension settlement and annuity transactions.
- Automotive cash generation, capital spending and liquidity available to the automotive business, including facility borrowing-base restrictions and cash held in foreign subsidiaries.
- GM Financial portfolio credit quality: its post-acquisition loan-loss allowance rose to $249M from $179M at year-end; consumer receivables more than 30 days delinquent or in repossession were 5.9% of contractual amounts due, versus 6.4% a year earlier.
- Material legal, tax, environmental and guarantee exposures, including the GM Korea wage litigation, South American proceedings and the Ally Financial dealer-inventory repurchase guarantee, whose stated maximum was $21.989B before potential resale recoveries.