General Motors Company — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unless indicated otherwise, dollar amounts are USD. The European Business is presented as discontinued operations; comparisons with 2017 are affected by its sale and related charges.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $35.8B | $33.6B | $108.7B | $107.9B |
| Operating income | $1.61B | $1.58B | $3.62B | $6.46B |
| Income from continuing operations | $2.53B | $0.11B | $6.01B | $5.23B |
| Net income attributable to stockholders | $2.53B | $(2.98)B | $5.97B | $1.29B |
| Diluted EPS | $1.75 | $(2.03) | $4.13 | $0.85 |
- Q3 revenue increased 6.4% year over year, led by GM North America and GM Financial. Nine-month revenue rose 0.7%; automotive revenue declined 0.8% while GM Financial revenue increased 17.1%.
- Q3 adjusted EBIT was $3.15B, versus $2.52B a year earlier; adjusted EPS was $1.87 versus $1.32. Nine-month adjusted EBIT was $8.96B versus $9.76B, and adjusted EPS was $5.11 versus $4.97.
- Q3 GM North America adjusted EBIT was $2.83B, with a 10.2% adjusted margin; GM International adjusted EBIT was $139M, with a 3.0% margin. GM Cruise had an adjusted loss of $214M. GM Financial adjusted pretax earnings were $498M.
- Management attributed North America’s nine-month adjusted EBIT decline to unfavorable mix and higher material, freight, engineering and manufacturing costs. International results were pressured by lower volumes and foreign exchange; China joint-venture equity income increased to $1.67B for the nine months.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $9.23B, versus $10.44B in 2017. Investing activities used $14.58B and financing activities provided $8.61B. Cash, cash equivalents and restricted cash ended at $20.86B; balance-sheet cash and cash equivalents were $18.44B.
- Automotive operating cash flow was $5.4B and capital expenditures were $6.5B. Including a $0.7B add-back for Korea restructuring management actions, adjusted automotive free cash flow was approximately $(0.4)B, versus $1.3B in the prior-year period.
- Total available liquidity was $33.9B, including $19.8B of available liquidity and $14.1B available under credit facilities. Automotive cash, cash equivalents and marketable securities were $18.0B; $1.8B of GM Cruise cash was designated for Cruise use.
- At September 30, automotive debt was $15.96B and GM Financial debt was $86.38B. GM Financial had $24.3B of available liquidity. GM issued $2.1B of senior unsecured notes in September, at a 5.03% initial weighted-average rate.
- Total assets were $225.7B, total liabilities $184.8B and total equity $40.9B. The filing reports current assets of $74.8B and current liabilities of $84.1B, including substantial GM Financial financing balances.
Changes, outlook and notable items
- GM raised its 2018 full-year outlook to the top of its stated ranges: diluted EPS of $4.82–$5.22 and adjusted diluted EPS of $5.80–$6.20. It expected GMNA adjusted EBIT margin of approximately 9%–10%; the stated U.S. industry breakeven range was 10–11 million units.
- Management targeted $6.5B of annual operational and functional cost savings through 2018 versus 2014, reporting approximately $6.2B realized by September 30. Its broader strategic plan includes targeting 10% core adjusted EBIT margins.
- Q3 and nine-month 2018 results reflect $440M of ignition-switch-related legal charges. Nine-month results also include approximately $1.1B of Korea restructuring charges, including $537M of non-cash impairments and other charges and $495M of employee separation charges. The Korea actions generated $748M of cash outflows.
- Accounting adoption affects comparability: ASC 606 reduced Q3 2018 reported automotive revenue by $683M and stockholder net income by $537M versus amounts calculated without adoption. For the first nine months, it increased automotive revenue by $281M but reduced stockholder net income by $432M. The filing says quarterly sales-incentive timing effects were expected to offset over full-year 2018.
- Management cited higher commodity and tariff costs, pricing pressure, weaker expected China demand and foreign-exchange volatility. GM Financial anticipated seasonal used-vehicle price weakness and a 4%–5% decline in 2019 versus 2018, reflecting expected growth in used-vehicle supply.
- After quarter-end, GM announced a voluntary severance program potentially covering up to approximately 18,000 salaried employees and executives in the U.S., Canada and Mexico. Estimated cost is about $130M for each 1,800 participants; total cost depends on participation. Honda also invested $750M in GM Cruise and agreed to additional contributions tied to licensing, partnership and joint development arrangements.
- Material contingencies include ignition-switch matters, GM Korea wage and subcontractor litigation, potential Takata-related repairs, and indirect tax disputes. The company estimated possible losses beyond accruals of approximately $580M and $160M for two GM Korea wage matters, $150M for potential subcontractor claims, up to $900M for indirect tax matters, and approximately $1.2B if certain U.S. Takata repairs are ultimately required. A potential Brazilian tax recovery of up to $1.2B remained uncertain and unrecorded.
- The ignition-switch deferred prosecution agreement charges were dismissed with prejudice in September 2018 after the monitor completed its term. GM nevertheless stated that additional liabilities may arise from unresolved recall-related matters and that an overall possible loss range could not be estimated.
Important facts for investors to verify
- Reconcile GAAP earnings and EPS with adjusted measures, including the effects of discontinued operations, ASC 606, tax items and restructuring/legal adjustments.
- Track automotive cash generation, capital spending, pension contributions and the sustainability of shareholder returns against available liquidity.
- Monitor GMNA margins and cost inflation, China joint-venture performance, and GM Financial credit quality, funding costs and used-vehicle residual values.
- Assess the eventual cost and timing of ignition-switch, Takata, GM Korea wage and labor, indirect-tax and Opel-related indemnity matters.
- Confirm participation and costs of the announced severance program, and the conditions and timing of committed KDB and SoftBank funding.