General Motors Company — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Amounts are in U.S. dollars unless otherwise noted. Results are unaudited.
Business context and financial results
GM designs, manufactures and sells vehicles and parts globally and provides financing through GM Financial. Its reporting segments are GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), GM South America (GMSA) and GM Financial. The company reported approximately 29 million vehicles subject to recalls announced in the first half of 2014.
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $39.649 billion | $39.075 billion | $77.057 billion | $75.959 billion |
| Operating income (loss) | $(471) million | $1.751 billion | $(1.006) billion | $2.710 billion |
| Net income attributable to stockholders | $278 million | $1.414 billion | $491 million | $2.589 billion |
| Net income attributable to common stockholders | $190 million | $1.200 billion | $315 million | $2.160 billion |
| Diluted EPS | $0.11 | $0.75 | $0.18 | $1.37 |
| Operating cash flow | Not separately stated | Not separately stated | $5.806 billion consolidated | $5.712 billion consolidated |
Automotive gross margin was $2.611 billion in Q2, down from $4.416 billion; for the first half it was $4.799 billion, down from $8.143 billion. The filing attributes much of the deterioration to recall costs, the catch-up recall estimate, higher material and freight costs, and product launches. GM’s non-GAAP automotive EBIT-adjusted was $1.094 billion for Q2 versus $2.022 billion, and $1.340 billion for the first half versus $3.608 billion.
Liquidity, debt and cash flow
At June 30, GM reported $19.864 billion of cash and cash equivalents, $9.935 billion of marketable securities, and $2.294 billion of restricted cash and marketable securities. Automotive available liquidity was $38.8 billion, including $10.4 billion available under credit facilities; GM Financial separately reported $4.2 billion of available liquidity. Management stated that current liquidity, credit facilities and operating cash flows were expected to meet liquidity needs.
Total reported debt was approximately $40.1 billion: $7.474 billion of automotive debt and $32.602 billion of GM Financial debt. First-half consolidated investing activities used $7.600 billion, including property expenditures, finance-receivable purchases and leased-vehicle purchases; financing activities provided $2.018 billion. Consolidated cash and cash equivalents declined $157 million during the first half to $19.864 billion. Automotive free cash flow, a non-GAAP measure, was $2.2 billion versus $1.2 billion in the prior-year period.
Material changes and segment performance
- Revenue increased 1.5% in Q2 and 1.4% in the first half. Automotive revenue was nearly flat year over year; GM Financial revenue grew substantially, primarily following the acquisition of Ally Financial international operations.
- GMNA first-half revenue rose to $50.075 billion from $46.474 billion, while adjusted EBIT fell to $1.942 billion from $3.390 billion. U.S. transaction prices were reported at record levels, supported by full-size pickups and SUVs.
- GME recorded adjusted losses of $305 million in Q2 and $589 million in the first half, both worse than the comparable periods. GMIO first-half adjusted EBIT declined to $567 million from $704 million, while GMSA reported a $237 million adjusted loss versus $16 million of adjusted income.
- China joint-venture equity income increased to $1.071 billion for the first half from $966 million. GM reported China sales of 1.7 million vehicles, up 10.5%, and a 14.4% China market share.
- GM began paying common dividends in 2014; $962 million was paid in the first half. Dividends declared were $0.30 per common share for Q2 and $0.60 for the first half.
Guidance, outlook, risks and unusual items
- Recalls and estimate change: GM recorded approximately $2.5 billion of recall-campaign and courtesy-transportation charges in the first half, with over 90% in GMNA. It also recorded an $874 million catch-up adjustment after changing GMNA recall accruals to an actuarial-based method, including accrual at vehicle sale. Management considered recorded recall amounts adequate, but a 10% increase in estimated take rates for announced recalls could add approximately $200 million to estimated costs.
- Ignition-switch compensation and litigation: GM recorded a $400 million charge for a compensation program with no cap on payments; it estimated the liability could be about $200 million higher. Claims were to be accepted August–December 2014, with payments expected to begin in Q3 2014. The company could not estimate a reasonably possible loss range for related lawsuits and investigations, which could result in material damages, fines or penalties.
- Other unusual charges: First-half results included a $419 million Venezuela currency-devaluation adjustment. GM also reported higher legal costs related to the recalls. The 2013 comparison included a $240 million debt-extinguishment loss that did not recur.
- Outlook: GM did not expect significant near-term improvement in the European auto industry but expected GME to be profitable by mid-decade. It was assessing Russian operations amid ruble and market deterioration, and other GMIO asset recoverability reviews remained possible. Management cited stronger-than-expected Europe and China performance, but weaker GMSA results amid difficult conditions in Venezuela and Brazil.
- Liquidity demands and exposure: Identified future cash needs included recall and compensation payments, restructuring, capital investment, debt service, a planned approximately $1.0 billion acquisition of a China finance-joint-venture interest, and possible purchase of remaining Series A preferred shares with a $3.9 billion liquidation amount once redeemable after December 31, 2014.
- Contingencies: GM disclosed potential additional losses of approximately $584 million beyond accruals for GM Korea hourly wage litigation and $157 million for salaried-employee claims. Environmental remediation losses were estimated at $110 million–$210 million. The company stated that adverse litigation outcomes could exceed accruals materially.
Key facts investors should verify
- How recall repair costs, vehicle repair rates and the new actuarial accrual method develop, including whether additional recalls or estimate revisions occur.
- The final cost and timing of ignition-switch compensation, and outcomes of related product-liability, shareholder and governmental proceedings.
- Whether operating performance recovers in Europe and South America and whether currency, regulatory or political conditions affect GM’s operations, especially in Russia, Venezuela, Brazil and Argentina.
- GM Financial credit quality and funding costs: its net receivables were $31.227 billion, its allowance was $615 million, and 5.1% of North American consumer finance receivables were more than 30 days delinquent at June 30, 2014.
- Ability to fund stated cash commitments while maintaining liquidity, and the effect of preferred-stock redemption and dividends on capital allocation.