General Motors Co quarterly report, Q3 FY2012

General Motors Company — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2012. Unaudited results; dollar amounts below are in U.S. dollars. Comparisons are with the corresponding 2011 period unless stated otherwise.

Business context

GM designs, manufactures and sells vehicles and parts worldwide and provides automotive financing through GM Financial. Its segments are GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), GM South America (GMSA) and GM Financial. China joint ventures are accounted for under the equity method rather than consolidated.

Key financial results

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Total net sales and revenue	$37.6bn	$36.7bn	$112.9bn	$112.3bn
Operating income	$1.6bn	$1.8bn	$4.4bn	$5.2bn
Net income attributable to stockholders	$1.8bn	$2.1bn	$5.0bn	$8.5bn
Net income attributable to common stockholders	$1.5bn	$1.7bn	$4.0bn	$7.1bn
Diluted EPS	$0.89	$1.03	$2.38	$4.30

Q3 total revenue rose 2.3%, while operating income and diluted EPS declined. Nine-month revenue was nearly flat, but net income fell substantially, reflecting, among other items, the absence of the 2011 New Delphi sale gain and higher 2012 goodwill impairment and income tax expense. Automotive gross margin was $4.3bn in Q3 versus $4.6bn, and $13.2bn for nine months versus $14.1bn.

Segment performance: Q3 adjusted EBIT was $1.822bn for GMNA, $(478) million for GME, $689 million for GMIO and $114 million for GMSA; GM Financial income before tax was $200 million. For the first nine months, adjusted EBIT was $5.478bn, $(1.095)bn, $1.775bn and $178 million, respectively; GM Financial income before tax was $598 million. GME’s deeper losses were associated with weak European demand, lower volume and competitive pricing.

Cash flow, liquidity and debt

• Consolidated operating cash flow for the first nine months was $9.824bn, up from $6.724bn. Automotive operating cash flow was $9.145bn; automotive capital expenditures were $5.993bn, yielding reported automotive free cash flow of $3.152bn versus $2.129bn.
• At September 30, cash and cash equivalents were $23.320bn and current marketable securities were $10.411bn. GM reported automotive available liquidity of $31.594bn and $5.919bn available under credit facilities, or $37.513bn in total including facilities. Liquidity includes balances needed to support operations and is subject to fluctuations.
• Automotive debt was $5.591bn; GM Financial debt was $11.062bn, for approximately $16.653bn combined. GM Financial debt increased from $8.538bn at year-end 2011, primarily with securitization issuance and $1.0bn of senior notes.
• Total assets were $155.456bn, total liabilities $112.827bn and total equity $42.629bn. Pension liabilities were $25.317bn; other postretirement benefit liabilities were $6.755bn.

Material changes and unusual items

• GM recorded $695 million of goodwill impairment in the first nine months: $590 million in GME and $105 million in GMIO. Q3 included $78 million relating to GM Korea. Goodwill was $28.408bn at September 30.
• GM consolidated its India holding company, HKJV, from September 1 after its ownership rose to 86%; it subsequently invested further, bringing its interest to 90.8%. The acquisition produced a reported $51 million gain.
• GM acquired GMAC South America for $29 million and recorded a $50 million bargain purchase gain. It also bought back a 1% interest in a China joint venture for $119 million.
• Equity income was $418 million in Q3 and $1.141bn year to date, compared with $2.903bn in the prior-year nine-month period, which included a $1.6bn gain on the New Delphi sale. China JV income was $1.121bn year to date.
• Defined-benefit plan remeasurement, including a lower discount rate, increased pension liability and accumulated actuarial loss. Q3 defined-benefit plan effects contributed to a $715 million other comprehensive loss.

Outlook, management commentary and risks

• Management expected Q4 2012 adjusted EBIT to follow typical seasonal trends and be similar to or slightly better than Q4 2011.
• GM expected adverse European conditions and regional losses to continue through the remainder of 2012, and targeted GME adjusted EBIT break-even by the middle of the decade. Further deterioration could require asset recoverability testing and material impairment charges.
• GM expected a Q4 pension settlement charge of approximately $2.9bn pre-tax ($3.4bn after tax) related to the U.S. salaried pension plan, with an estimated $0.2bn unfavorable annual earnings impact thereafter. The transaction was expected to reduce pension obligations by approximately $28.7bn, including lump-sum payments and the settlement.
• Management said sustained U.S. and Canadian profitability and favorable forecasts could support reversal of some or all valuation allowances in Q4, producing a significant tax benefit. U.S. and Canadian deferred-tax-asset valuation allowances were $35.6bn and $3.2bn. A reversal could also increase the risk of a material GMNA goodwill impairment.
• GM was negotiating to refinance its $5.0bn secured revolving credit facility, potentially increasing capacity to approximately $10.0bn; completion was not assured. GM Financial had bid for certain Ally Financial international operations, with no assurance of success; a transaction could materially increase its scale and debt.
• Contingencies include a Saab-related lawsuit seeking at least $3.0bn; GM Korea wage claims with reasonably possible exposure estimated at about $600 million above the recorded accrual; environmental remediation losses estimated at $130–$280 million; and potential South American tax-related escrow or payments that could range up to $0.9bn. GM stated that adverse litigation outcomes could exceed recorded accruals.
• Additional risks include weak European demand, foreign-exchange movements, vehicle quality and recalls, commodity costs, financing availability, pension assumptions, supplier disruption, and execution of restructuring plans. The filing reported no material change to the risk factors in the 2011 Form 10-K.

Important facts for investors to verify

• Whether Q4 operating performance and European losses develop in line with management’s outlook.
• The actual amount, timing and accounting effects of the salaried pension settlement and related cash funding.
• Whether GM reverses deferred-tax valuation allowances, and any associated goodwill impairment.
• Progress on the revolving-credit refinancing and GM Financial’s potential international acquisition, including effects on debt and liquidity.
• Developments in the Saab, GM Korea wage, environmental and South American tax matters, including possible cash or escrow requirements.
• Credit quality trends at GM Financial: its allowance for post-acquisition loan losses rose to $291 million from $179 million at year-end 2011, and consumer receivables more than 30 days delinquent or in repossession were 7.4% of the contractual amount due, versus 6.8% a year earlier.