General Motors Company — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unless otherwise noted, financial amounts are U.S. dollars. The Opel/Vauxhall business and European financing subsidiaries are reported as discontinued operations and held for sale in all periods presented; continuing-operations comparisons therefore exclude them.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Continuing-operations revenue | $36.984B | $37.383B | $74.250B | $70.399B |
| Operating income | $2.618B | $2.972B | $5.522B | $5.063B |
| Income from continuing operations | $2.433B | $2.744B | $5.119B | $4.667B |
| Net income attributable to common stockholders | $1.660B | $2.866B | $4.268B | $4.819B |
| Diluted EPS, total | $1.09 | $1.81 | $2.80 | $3.05 |
| Diluted EPS, continuing operations | $1.60 | $1.74 | $3.35 | $2.98 |
| EBIT-adjusted (non-GAAP) | $3.682B | $3.846B | $7.236B | $6.588B |
| EPS-diluted-adjusted (non-GAAP) | $1.89 | $1.79 | $3.64 | $3.05 |
Q2 continuing revenue declined 1.1% year over year, while H1 revenue rose 5.5%, led by GM Financial and South America. GAAP total earnings fell mainly because of the European disposal-related loss: discontinued operations recorded a net loss of $770 million in Q2 and $839 million in H1, versus income of $106 million and $114 million in the comparable 2016 periods.
- Segment results, Q2: GM North America (GMNA) EBIT-adjusted was $3.475B, with a 12.2% margin, versus $3.745B and 12.4%. GM International Operations (GMIO) was $340M and 10.6%, versus $190M and 5.7%. GM South America (GMSA) had a $23M adjusted loss, versus a $118M loss. GM Financial pretax income-adjusted was $357M, up 66.8%.
- Segment results, H1: GMNA EBIT-adjusted was $6.946B, up 13.3%, with a 12.0% margin. GMIO was $637M, up 2.1%, with a 10.0% margin. GMSA had a $142M adjusted loss, improved from a $182M loss. GM Financial pretax income-adjusted was $585M, up 43.7%.
- Automotive China joint ventures contributed $509M of equity income in Q2 and $1.013B in H1, slightly above the year-earlier periods.
Cash flow, balance sheet and liquidity
- H1 consolidated operating cash flow was $7.559B, including $7.428B from continuing operations. Continuing-operations investing cash flow was a use of $13.135B, reflecting finance-receivable and leased-vehicle investment as well as capital spending.
- Automotive operating cash flow from continuing operations was $6.2B in H1; capital expenditures were $4.1B and adjusted automotive free cash flow was $2.0B. GM reported automotive available liquidity of $34.6B at June 30, including $20.5B of cash and marketable securities and $14.1B available under credit facilities, versus $35.8B at year-end.
- GM Financial available liquidity was $16.0B, up from $11.2B at year-end. Its H1 operating cash flow was $3.2B; investing cash flow was a use of $13.7B and financing cash flow provided $13.4B.
- Consolidated cash and cash equivalents were $16.598B and marketable securities were $9.133B. Automotive debt totaled $10.610B; GM Financial debt totaled $78.479B, up from $64.563B at December 31, 2016. GM Financial’s borrowing largely funds its expanding receivables and lease portfolio.
- Total assets were $240.3B and total liabilities were $194.6B at June 30. The balance sheet includes material assets and liabilities held for sale and GM Financial financing structures; the filing does not present a single company-wide liquidity ratio as a substitute for these details.
- GM paid $1.145B of dividends and repurchased $1.496B of common stock in H1. The quarterly dividend declared was $0.38 per share. Three major rating agencies upgraded GM ratings during 2017; their outlooks were Stable.
Material changes and management commentary
- Continuing revenue increased year over year in H1, but lower wholesale volumes weighed on automotive results. GMNA’s H1 adjusted EBIT improved through pricing, mix and lower warranty/manufacturing costs, partly offset by engineering costs and costs on recently launched models.
- GM Financial revenue grew 41% in H1, primarily from leased-vehicle income and a larger portfolio. North American retail penetration rose to approximately 44% from 35% a year earlier. Average debt outstanding increased 40.5% in H1.
- GM announced withdrawal of Chevrolet from India and South Africa by year-end 2017 and a transition of South African manufacturing to Isuzu. Related Q2 GMIO restructuring charges were $460M, including asset, inventory, dealer, employee and contract costs. GM also recorded an $80M charge associated with deconsolidating Venezuela after authorities seized its plant and operations ceased.
- GM’s strategic targets include 9%–10% EBIT-adjusted margins by early next decade and $6.5B in cumulative operational and functional cost savings through 2018 versus 2014; approximately $5.0B had been realized by June 30.
Outlook, transaction and risks
- For 2017, management expected revenue and EBIT-adjusted to equal or exceed 2016 levels, ROIC-adjusted above 25%, automotive operating cash flow from continuing operations of approximately $15B, and adjusted automotive free cash flow from continuing operations of approximately $7B. It forecast diluted EPS of $1.60–$2.43 and adjusted diluted EPS of $6.00–$6.50. The outlook includes a substantial expected European-sale charge and related adjustments; the adjusted measure is non-GAAP.
- GM expected GMNA’s 2017 adjusted EBIT margin to exceed 10%, with U.S. industry sales in the low 17-million-unit range. Management cited continued China pricing pressure and expected used-car prices to decline approximately 7% in 2017, with excess used-vehicle supply pressuring values through at least 2018.
- GM agreed to sell its European Business to PSA Group for estimated net consideration of approximately $2.2B, subject to currency movements and purchase-price adjustments. Closing was expected in the second half of 2017 for Opel/Vauxhall, with the financing businesses potentially closing later and only if the main transaction closes. GM expected a total charge of approximately $5.5B–$6.0B; $745M of identified disposal and program-cancellation charges were recorded in Q2 before tax.
- GM expects to retain approximately $7.0B of net underfunded European pension liabilities; PSA is to assume approximately $2.9B. GM expects to pay approximately $3.4B at closing toward transferred pension liabilities and plans to fund this initially through its revolving credit facility, then potentially issue debt to repay the draw.
- Key exposures include ignition-switch and other recall litigation, government investigations, product liability, Takata airbag proceedings, emissions claims, Korean wage litigation and indirect-tax matters. GM cited up to $900M of possible Takata-related repair exposure in the U.S. if repairs are ultimately required, and reasonably possible losses above accruals of approximately $547M for Korean hourly wage cases, $167M for Korean salaried cases and up to $900M for indirect-tax matters. A potential Brazilian tax recovery of up to $1.4B was not recorded because the outcome remained uncertain.
- GM’s stated risks include vehicle demand and competitive conditions, China pricing and joint-venture dependence, foreign exchange and political uncertainty, emissions and safety regulation, recalls and litigation, supplier continuity, pension assumptions, restructuring outcomes and completion of the PSA transaction. The filing reported no material change to the risk factors in GM’s 2016 Form 10-K.
Important facts for investors to verify
- Whether the PSA transaction closes on the expected timetable, the final proceeds and pension funding amounts, and the realized $5.5B–$6.0B charge.
- Whether GM meets its 2017 cash-flow, margin and EPS guidance, including the reconciliation between GAAP and adjusted forecasts.
- GM Financial’s lease residual values, used-vehicle pricing assumptions, credit losses, portfolio growth and rising debt funding needs.
- Developments in recall, Takata, emissions, wage and tax matters, including exposures that the company says cannot yet be estimated reliably.
- Whether North American demand, China pricing, international restructuring and currency movements support management’s earnings and margin expectations.
EBIT-adjusted, EPS-diluted-adjusted, ROIC-adjusted and adjusted automotive free cash flow are non-GAAP measures; GM cautions that they may not be comparable with similarly named measures at other companies.