General Motors Co quarterly report, Q2 FY2011

General Motors Company — Q2 2011 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2011. GM designs, manufactures and sells vehicles and parts globally and, following its October 2010 acquisition of GM Financial, also provides automotive financing. Unless otherwise noted, financial amounts below are in U.S. dollars.

Financial performance

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Net sales and revenue	$39.4 billion	$33.2 billion	$75.6 billion	$64.7 billion
Operating income	$2.45 billion	$1.90 billion	$3.40 billion	$3.10 billion
Net income attributable to stockholders	$2.99 billion	$1.54 billion	$6.36 billion	$2.60 billion
Diluted earnings per common share	$1.54	$0.85	$3.27	$1.40

• Q2 revenue increased 18.7%; management attributed the increase mainly to higher wholesale volumes, favorable pricing and mix, currency translation, and GM Financial revenue.
• Automotive gross margin was $5.25 billion, or about 13.4% of automotive revenue, versus $4.57 billion, or about 13.8%, a year earlier. Higher material and engineering costs, currency effects and vehicle mix weighed on results.
• Six-month operating cash flow was $4.69 billion, including $4.37 billion from Automotive and $0.32 billion from GM Financial, versus $5.70 billion in the prior-year period. Six-month capital expenditures were $2.49 billion; investing cash flow was a $5.19 billion use, including increased investments in marketable securities and asset-sale proceeds.
• At June 30, cash and cash equivalents were $20.47 billion and marketable securities $12.30 billion. Available liquidity was $32.77 billion, or $38.67 billion including available credit facilities; a further $1.04 billion in the Canadian healthcare trust escrow was restricted.
• Automotive short- and long-term debt totaled $4.72 billion. GM Financial reported $6.88 billion of securitization notes and $0.42 billion of credit facilities; it also issued $500 million of 6.75% senior notes in June. Automotive pension liabilities were $21.39 billion.

Material changes and operating results

• Q2 automotive EBIT was $2.98 billion. GM North America contributed $2.25 billion; GM International Operations $573 million; GM Europe $102 million; and GM South America $57 million. GM Financial reported $144 million of pretax income.
• GM Europe remained loss-making for the first half, with an EBIT loss of $288 million, though improved from a $637 million loss in the comparable 2010 period. GM South America first-half EBIT fell to $147 million from $460 million; GM International Operations EBIT declined to $1.05 billion from $1.41 billion.
• Six-month net income included a $1.6 billion gain from selling GM’s New Delphi interests and a $0.3 billion gain from selling Ally Financial preferred stock. Equity income also reflected a $395 million first-quarter GM Europe goodwill impairment charge and $39 million impairment of the HKJV investment. GM recorded an additional $1.5 billion cumulative-effect reduction to opening retained earnings on adopting a goodwill accounting standard.
• Automotive interest expense declined to $304 million for the first half from $587 million, principally following repayment of government and VEBA debt in 2010. The Q2 tax benefit of $61 million included previously unrecognized tax benefits; the six-month tax expense was $76 million.

Outlook, risks and contingencies

• The filing gives no specific consolidated earnings or revenue guidance. Management said available liquidity and expected operating cash flow should meet needs, while identifying pension and healthcare payments, capital spending, restructuring, debt reduction and potential South American tax-related deposits as future cash demands.
• Management expected approximately $400 million of additional Opel/Vauxhall restructuring costs, primarily in 2011–2012, affecting about 2,000 additional employees. The company reported that spending milestones under its European labor agreement were met through June 30.
• Management said the Japan earthquake-related supply disruption had minimally affected production and expected its effect on 2011 production to be immaterial, while warning that supplier interruptions could disrupt production. U.S. demand and GMNA production and sales had improved; management identified China as a key growth market.
• Key risks include competition and economic weakness, commodity and currency movements, vehicle quality and recalls, reliance on suppliers and financing availability, regulatory costs for fuel economy and emissions, and pension assumptions. GM warned of possible further material non-cash goodwill impairment in Europe.
• Recorded litigation-related liabilities included $419 million for product liability and $1.63 billion for other litigation and tax administrative matters. Environmental reserves were $183 million; estimated remediation losses ranged from $145 million to $360 million. Potential South American tax escrows could range from $640 million to $850 million. GM Korea had a $119 million accrual for wage litigation; the filing described a possible additional exposure of up to $459 million.
• GM’s maximum potential vehicle repurchase obligation under its Ally Financial dealer arrangement was $20.92 billion, although resale proceeds could reduce realized exposure. A proposed Canadian retiree healthcare trust settlement had not been recognized at June 30 because conditions precedent remained outstanding.

Most important facts for investors to verify

• How much of reported earnings reflects recurring vehicle operations versus the New Delphi and Ally Financial gains, tax benefits and other unusual items.
• Whether Automotive cash generation and working capital improve, given lower operating cash flow year over year and higher receivables and inventories.
• GM Europe’s operating recovery and the assumptions that could trigger further goodwill impairment.
• Actual exposure and developments in GM Korea wage litigation, South American tax proceedings, the Canadian healthcare settlement and Ally-related repurchase guarantees.
• Whether supplier availability, commodity costs, regulatory requirements and customer demand affect production, margins and the stated liquidity outlook.