General Motors Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Dollar amounts are in U.S. dollars. Unless noted, comparisons are with 2017; the European Business is reported as discontinued operations.
Business context
GM designs, builds and sells vehicles and parts worldwide and provides automotive financing through GM Financial. Reportable segments are GM North America (GMNA), GM International (GMI), GM Cruise and GM Financial. GM began reporting Cruise as a separate segment in Q2 2018 and recast prior-period segment information. GM’s European businesses were sold in 2017.
Key financial metrics
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Total revenue | $36.76 billion, down 0.6% | $72.86 billion, down 1.9% |
| Operating income | $1.48 billion | $2.01 billion |
| Income from continuing operations | $2.37 billion | $3.48 billion |
| Net income attributable to stockholders | $2.39 billion | $3.44 billion |
| GAAP diluted EPS | $1.66 | $2.38 |
| EBIT-adjusted, non-GAAP | $3.19 billion | $5.80 billion |
| Adjusted diluted EPS, non-GAAP | $1.81 | $3.24 |
Q2 2017 included a $770 million after-tax discontinued-operations loss; Q2 2018 had none. Six-month 2018 discontinued operations recorded a $70 million loss. Thus, reported net income comparisons are affected by the European divestiture and should be read alongside continuing-operations and adjusted measures.
- Margins: GMNA EBIT-adjusted margin was 9.4% in Q2 versus 12.2% a year earlier, and 8.7% for the first half versus 12.0%. GMI’s Q2 margin was 3.0% versus 5.8%; its first-half margin was 3.5% versus 4.6%.
- Cash flow and investment: Consolidated operating cash flow was $5.55 billion for the first half versus $7.56 billion. Automotive operating cash flow was $2.9 billion versus $6.4 billion; capital expenditures were $4.3 billion. Management reported $0.7 billion of Korea restructuring cash outflows as an adjustment in its adjusted automotive free-cash-flow measure.
- Liquidity: Cash and cash equivalents were $15.09 billion and marketable securities $6.92 billion at June 30. Total available liquidity was $32.1 billion, including $2.0 billion restricted to GM Cruise and $14.1 billion available under credit facilities. GM Financial separately reported available liquidity of $22.0 billion.
- Debt: Automotive debt was $13.82 billion; GM Financial debt was $84.44 billion. GM Financial debt supports its finance and lease portfolio and is not directly comparable to automotive debt.
- Other: Equity income was $637 million in Q2 and $1.29 billion for the first half, primarily from China joint ventures. Product warranty liabilities were $7.99 billion at June 30.
Material changes versus the prior comparable period
- Revenue declined year over year, as lower automotive revenue—down 2.0% in Q2 and 3.8% for the first half—offset GM Financial growth. GM Financial revenue rose 16.7% in Q2 and 20.2% year to date, supported by a larger lease portfolio.
- EBIT-adjusted and adjusted EPS fell in both comparison periods. GM cited lower vehicle mix and volume, higher material, freight, manufacturing and engineering costs, and currency pressures. Q2 interest and other non-operating income increased to $930 million from $272 million, aided by investment revaluations and licensing income.
- GMNA’s first-half wholesale sales declined 1.0%; U.S. market share improved to 16.8% from 16.4%. China joint-venture equity income increased to $1.19 billion for the first half from $1.01 billion.
- GM adopted the new revenue standard in 2018 without restating prior periods. It changes the timing of sales incentives and the accounting for certain daily-rental vehicle transfers. The filing reports a $324 million reduction in Q2 pretax income from adoption, but a $121 million increase for the first half.
- GM’s first-half results included approximately $1.1 billion of Korea restructuring charges, including asset impairments and employee separation costs. GM also invested $1.1 billion in Cruise, which issued $900 million of preferred shares to SoftBank.
Guidance, management commentary and risks
- For 2018, GM expected GAAP diluted EPS of approximately $5.14 (range $4.94–$5.34) and adjusted diluted EPS of approximately $6.00 (range $5.80–$6.20). The adjusted forecast excludes the specified Korea restructuring adjustment and is not a guarantee of results.
- GM expected GMNA’s 2018 EBIT-adjusted margin to be approximately 9%–10%, citing higher commodity costs, pricing pressure and anticipated tariff costs. It forecast U.S. industry sales of approximately 17 million vehicles and estimated GMNA’s U.S. industry break-even level at 10–11 million units.
- Management targeted $6.5 billion of annual operational and functional savings through 2018 versus 2014, reporting approximately $6.0 billion achieved by June 30. It also expected annual capital expenditures of about $8.5 billion and targeted average adjusted ROIC of at least 20%.
- Used-vehicle prices in the U.S. were expected to decline 2%–4% versus 2017. GM noted that increased off-lease vehicle supply could pressure residual values and GM Financial results.
- GM said it believed its liquidity and credit access were sufficient for needs, but identified substantial cash requirements for investment, recalls, debt service, pensions and shareholder returns. Automotive cash and marketable securities declined to $16.0 billion from $19.6 billion at year-end 2017.
- Contingencies: GM estimated a possible Takata-related U.S. repair impact of about $1.0 billion if repairs are ultimately required; no provision was recorded for the vehicles covered by its pending petitions. Possible losses beyond accruals included approximately $570 million for GM Korea hourly wage claims, $160 million for salaried wage claims, $150 million for potential subcontract-worker claims, and up to $1.0 billion for indirect-tax matters. GM also described a possible Brazil tax recovery of up to $1.2 billion, which was not recorded and remained uncertain.
- Ignition-switch and other recall litigation, emissions claims, government investigations, pension obligations, foreign exchange, commodity costs, tariffs, regulatory changes and restructuring execution remain risks. GM stated that reasonably possible losses in some proceedings could exceed recorded accruals and that certain exposures could not be estimated.
Most important facts for investors to verify
- Whether 2018 EPS and GMNA margin guidance remained achievable given cost inflation, tariffs, mix and pricing pressures.
- Automotive cash generation and liquidity trends, including the effect of capital spending, shareholder returns and Korea funding commitments.
- GM Financial’s credit performance, lease residual values, funding costs and debt growth.
- Progress and cash costs of Korea restructuring, and whether further restructuring or asset impairments are required.
- Developments in Takata, ignition-switch, Korea labor, indirect-tax and other litigation exposures, including any changes to accruals or estimated ranges.
- The effects of the new revenue standard and other non-GAAP adjustments when comparing reported results across periods.