General Motors Co quarterly report, Q3 FY2016

General Motors Co. — Form 10-Q summary

Reporting period: Quarter and nine months ended September 30, 2016. GM designs, manufactures and sells vehicles and parts globally, and provides vehicle financing through GM Financial. Financial amounts below are U.S. dollars; billions are identified as such.

Financial performance

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Net sales and revenue	$42.8B	$38.8B	$122.5B	$112.7B
Operating income	$3.0B	$1.0B	$8.0B	$3.0B
Net income attributable to common stockholders	$2.8B	$1.4B	$7.6B	$3.4B
Diluted GAAP EPS	$1.76	$0.84	$4.81	$2.07
Diluted adjusted EPS (non-GAAP)	$1.72	$1.50	$4.84	$3.63

Q3 revenue rose 10.3% year over year. Automotive revenue increased 8.6%, chiefly on higher GMNA volumes; GM Financial revenue increased 46.3%, primarily from growth in its leased-vehicle portfolio.
Q3 GMNA adjusted EBIT was $3.5B, with an 11.2% margin (versus 11.8%); GME posted a $142M adjusted EBIT loss, GMIO earned $271M, and GMSA recorded a $121M adjusted EBIT loss. GM Financial adjusted pretax earnings were $229M, versus $231M.
For the first nine months, GMNA adjusted EBIT was $9.4B (10.7% margin); GME’s adjusted loss narrowed to $11M from $515M; GMIO adjusted EBIT declined to $819M from $989M; and GMSA’s adjusted loss narrowed to $309M from $575M. China joint-venture equity income was $1.4B, slightly below the prior-year period.
Consolidated cash from operating activities was $12.5B for nine months, compared with $9.5B. Investing used $24.1B and financing provided $12.2B; cash and cash equivalents ended at $15.9B. Automotive operating cash flow was $10.0B; adjusted automotive free cash flow, a non-GAAP measure, was $5.2B after $6.8B of capital spending and adding back $2.0B of discretionary pension contributions.
At September 30, automotive available liquidity was $35.5B, including $21.5B of cash and marketable securities and $14.0B available under credit facilities. GM Financial reported $14.9B of available liquidity.
Automotive debt was $10.8B, up from $8.8B at year-end 2015. GM Financial debt was $68.3B, up from $54.3B; its growth accompanied expansion in receivables and leased vehicles. Total liabilities were $172.6B and total equity was $45.0B.

Material changes and notable items

Higher Q3 GAAP earnings partly reflect the prior-year comparison: Q3 2015 included approximately $1.5B of ignition-switch-related legal charges, while Q3 2016 included a $110M net benefit for related legal matters. Nine-month adjusted EPS also benefited from fewer recall/legal adjustments and the absence of prior-year Russia-exit, Thailand impairment and Venezuela devaluation charges.
GM Financial continued to shift toward leasing and prime lending. North American retail-finance receivables classified as subprime fell to 51% from 60% at year-end 2015; receivables more than 30 days delinquent or in repossession were 5.2% of the portfolio, versus 5.8% at year-end.
GM acquired autonomous-vehicle company Cruise Automation in May for $581M, funded with $291M cash and approximately $290M in newly issued shares. GM also invested $500M in Lyft, recorded as a cost-method investment.
GM completed the previously authorized $5B share-repurchase program ahead of schedule; it had repurchased $5.0B of shares through October 21. A further $4B authorization was in place through 2017. The quarterly dividend was increased to $0.38 per share.
GM contributed $2.0B to its U.S. hourly pension plan, funded with proceeds from $2.0B of automotive notes. Pension and OPEB cash payments/contributions were $3.1B consolidated for the nine-month period.

Outlook, risks and contingencies

For full-year 2016, management forecast adjusted diluted EPS of $5.50–$6.00 and expected results near the high end. Its 2016 forecast included $13B of automotive operating cash flow, $9B of capital expenditures, and $6B of adjusted automotive free cash flow after the pension-contribution adjustment.
Longer-term targets included 9%–10% consolidated adjusted EBIT margins by early next decade, adjusted automotive free cash flow averaging approximately $6B–$7B annually in 2016–2018, ROIC-adjusted above 20%, and $5.5B of annual operating and functional cost savings by 2018 versus 2014.
Management expected a GMNA adjusted EBIT margin of approximately 10% for 2016. In Europe, it remained on track to break even for the year, but said sustained post-Brexit market conditions could adversely affect second-half results by up to $0.4B; approximately $0.1B was reflected in Q3.
GM identified China pricing and competition, weak South American conditions, foreign-exchange volatility, and possible additional restructuring as risks. It also noted potential regulatory scrutiny of German diesel emissions.
Recall-related litigation and investigations remain significant uncertainties. The company had $1.3B accrued for litigation-related matters, but said additional ignition-switch-related liabilities were probable for at least some matters and it could not estimate an overall loss range. A Second Circuit decision weakened GM’s bankruptcy-sale-order defense for certain claims; GM intended to appeal to the U.S. Supreme Court.
GM made no provision for possible Takata inflator repairs, stating it believed no repair would ultimately be required for the identified vehicles. It estimated reasonably possible costs of up to $320M for 2.5M GMT900 vehicles and a further $550M for up to 4.3M vehicles potentially covered by future Takata filings.
Other disclosed exposures include reasonably possible indirect-tax losses of up to approximately $1.0B above accruals; up to $551M of reasonably possible excess exposure in GM Korea wage litigation; and South American tax-related security or escrow requirements estimated at $300M–$700M. Potential outcomes and timing remain uncertain.

Most important facts for investors to verify

Whether full-year adjusted EPS reaches the $5.50–$6.00 range and whether GMNA achieves its approximately 10% adjusted EBIT margin outlook.
How much of earnings and cash generation is recurring versus affected by recall/legal items, pension contributions, and other adjustments to non-GAAP measures.
Developments in ignition-switch litigation and Takata testing, including any change in expected repair costs, accruals, or legal exposure.
Whether GM Financial’s growing lease portfolio and debt remain supported by credit quality, used-vehicle values, delinquencies, and funding access.
Trends in China joint-venture income and pricing, European performance after the U.K. referendum, and continued losses or restructuring needs in South America.
Automotive liquidity, capital spending, pension funding, and the pace of the remaining share-repurchase authorization and dividends.