General Motors Co quarterly report, Q2 FY2015

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Business context and reporting period

General Motors Company’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2015. GM designs, manufactures and sells vehicles and parts worldwide and provides financing through GM Financial. Unless otherwise stated, amounts below are in U.S. dollars.

Financial performance and position

MetricQ2 2015Q2 2014Six months 2015Six months 2014
Net sales and revenue$38.180B$39.649B$73.892B$77.057B
Operating income (loss)$1.288B$(0.471)B$2.041B$(1.006)B
Net income attributable to stockholders$1.117B$0.278B$2.062B$0.491B
Diluted EPS$0.67$0.11$1.23$0.18
  • Q2 revenue fell 3.7% year over year; six-month revenue declined 4.1%. Automotive revenue decreased, while GM Financial revenue grew 27.2% in Q2 and 25.4% for the half.
  • GMNA adjusted EBIT was $2.780B in Q2 and $4.962B for the half. GME reported adjusted losses of $45M and $284M, respectively; GMIO adjusted EBIT was $349M and $720M; GMSA adjusted losses were $144M and $358M. GM Financial adjusted pretax income was $225M in Q2 and $439M for the half.
  • Six-month consolidated operating cash flow was $6.161B, versus $5.806B a year earlier. Automotive operating cash flow was $5.1B; automotive adjusted free cash flow was $1.7B, down from $2.2B.
  • At June 30, cash and cash equivalents were $17.627B and marketable securities were $7.2B. Automotive available liquidity was $34.9B, down from $37.2B at year-end; GM Financial available liquidity was $11.9B, up from $8.3B.
  • Automotive debt was $9.187B and GM Financial debt was $44.330B at June 30. Automotive pension liabilities were $22.177B; other postretirement benefit liabilities were $6.075B.
  • Total assets were $185.812B and total equity was $35.670B. Automotive inventories were $14.218B, compared with $13.642B at December 31, 2014.

Material changes versus the prior comparable period

  • Profit improved substantially year over year, with positive operating income and higher net income and EPS in both the quarter and first half. Lower recall-related costs and improved GMNA results were major contributors; comparisons also reflect unusual charges in 2014.
  • GMNA adjusted EBIT rose to $2.780B in Q2 from $1.385B and to $4.962B for the half from $1.942B, aided by volume, mix and lower recall, material and freight costs.
  • Automotive revenue weakened outside North America, particularly in South America and Europe, reflecting lower volumes, foreign exchange and market pressures. Worldwide wholesale vehicle sales declined 3.9% in the first half.
  • GM Financial’s larger lease portfolio drove revenue growth, but adjusted pretax income declined 12.8% in Q2 and 8.4% for the half, as lease expenses and debt-related costs absorbed much of the increase.
  • GM repurchased $2.0B of common stock during the first half and raised its quarterly dividend from $0.30 to $0.36 per share. Fitch upgraded GM’s credit rating to investment grade in June; the filing states all four rating agencies then rated GM investment grade.

Outlook, management commentary, risks and unusual items

  • Management expected 2015 consolidated adjusted EBIT and margins to improve year over year, with adjusted automotive free cash flow flat to slightly higher than 2014 and consolidated ROIC above 20%. Its longer-term target was 9%–10% consolidated adjusted EBIT margins by the 2020s. These are targets, not guarantees.
  • GM expected GMNA adjusted EBIT and margins to improve in 2015 and targeted a 10% GMNA adjusted EBIT margin in 2016. It expected GME to return to positive adjusted EBIT in 2016. GM Financial’s 2015 adjusted pretax income was expected to remain consistent with 2014.
  • GMSA’s prior outlook for improved 2015 adjusted EBIT and margins was described as at risk, despite expected second-half improvement. Brazil’s downturn and currency weakness, and difficult conditions in Venezuela, were key concerns. China growth and pricing pressure were also more challenging than initially expected.
  • GM announced it would cease manufacturing in Russia, end Opel distribution and reduce Chevrolet distribution there by year-end 2015. First-half Russia-model-change charges were $443M before noncontrolling interests; additional exit costs of up to $100M through 2016 were possible. GM also recorded $297M of Thailand impairments, and $604M of Venezuela currency devaluation charges plus $116M of asset impairments.
  • The ignition-switch compensation program had cumulative charges of $625M and a $363M accrual at June 30. GM could not estimate a reasonably possible loss range for related lawsuits and investigations and warned outcomes could materially affect results, cash flows or financial condition. The broader recall liability and product-liability exposure remain subject to estimation uncertainty.
  • Other contingencies include Korean wage litigation, for which the company disclosed reasonably possible losses beyond accruals of $515M for hourly claims and $155M for salaried claims. Certain South American indirect-tax proceedings may require $400M–$600M in escrow deposits.
  • GM reported $33.4B of net deferred tax assets and $4.5B of valuation allowances for European operating businesses. If profitability evidence continues to improve, a material valuation-allowance reversal could occur as early as Q4 2015.
  • Management cited risks including vehicle quality and recalls, litigation and investigations, labor negotiations, foreign exchange and economic volatility, China market conditions, restructuring execution, pension assumptions and access to financing. It stated there were no material changes to the risk factors in its 2014 Form 10-K.

Most important facts for investors to verify

  1. Whether the improvement in reported earnings is sustainable after separating operating performance from recall-cost comparisons, restructuring, impairment and currency-related items.
  2. Cash generation and liquidity trends, including automotive adjusted free cash flow, the $20B combined cash-and-securities target and planned share repurchases and dividends.
  3. Exposure to ignition-switch and other recall litigation, government investigations, product liability and the adequacy of related accruals.
  4. Progress against regional outlooks, particularly GMSA’s at-risk guidance, the European turnaround target and China pricing and demand conditions.
  5. GM Financial’s credit performance: consumer receivables more than 30 days delinquent or in repossession were 5.4% at June 30, versus 5.2% a year earlier; the filing also reports rising loan-loss provisions.