General Motors Co quarterly report, Q3 FY2015

General Motors Company — Q3 2015 Form 10-Q

Reporting period: Three and nine months ended September 30, 2015. All amounts are U.S. dollars unless stated otherwise. The interim financial statements are unaudited.

Business context and financial performance

GM designs, manufactures and sells vehicles and parts globally and provides automotive 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. China joint-venture revenue is not consolidated; GM records its share of earnings as equity income.

Metric	Q3 2015	Q3 2014	Nine months 2015	Nine months 2014
Total net sales and revenue	$38.843bn	$39.255bn	$112.735bn	$116.312bn
Operating income	$997m	$1.227bn	$3.038bn	$221m
Income before income taxes	$1.506bn	$1.869bn	$4.660bn	$1.958bn
Net income attributable to stockholders	$1.359bn	$1.471bn	$3.421bn	$1.962bn
Diluted EPS	$0.84	$0.81	$2.07	$0.99

Q3 revenue declined 1.0%; nine-month revenue declined 3.1%. Automotive revenue fell 2.3% in Q3 and 4.1% year to date, while GM Financial revenue rose 35.6% and 29.0%, respectively, mainly as its leased-vehicle portfolio expanded. Equity income was $502m in Q3 and $1.579bn year to date, mostly from China joint ventures.

Q3 net income attributable to stockholders included approximately $1.5bn of ignition-switch-related legal charges recorded in automotive SG&A. The filing reports adjusted segment measures separately from GAAP results: Q3 adjusted EBIT was $3.293bn for GMNA, a $231m loss for GME, $269m for GMIO and a $217m loss for GMSA; GM Financial adjusted pretax income was $231m. These non-GAAP measures exclude specified adjustments and should not be treated as GAAP earnings.

Cash flow, debt and liquidity

• Consolidated operating cash flow was $9.469bn for the first nine months, versus $6.894bn a year earlier. Automotive operating cash flow was $7.8bn; automotive adjusted free cash flow was $2.5bn versus $1.3bn.
• Consolidated investing cash outflow was $20.179bn, reflecting, among other items, $11.036bn of net leased-vehicle purchases and $13.101bn of finance-receivable purchases, partly offset by collections and other investment flows. Financing cash inflow was $8.344bn.
• Cash and cash equivalents were $15.433bn at September 30, down from $18.954bn at year-end 2014. Marketable securities were $8.029bn. Automotive available liquidity, including credit facilities, was $34.0bn, down from $37.2bn at year-end.
• Automotive debt was $9.144bn; GM Financial debt was $48.259bn, for approximately $57.4bn combined. GM Financial debt increased from $37.431bn at year-end, alongside growth in its receivables and leased-vehicle assets. GM reported $12.6bn of credit facilities, with $0.4bn in letter-of-credit use and no borrowing against its primary facilities.
• Total assets were $189.0bn and total liabilities were $153.9bn. Automotive liquidity and GM Financial liquidity are reported separately; GM Financial reported $10.6bn of available liquidity.

Material changes and management outlook

• GMNA remained the main earnings contributor: nine-month adjusted EBIT rose to $8.255bn from $4.394bn. Management attributed much of the increase to lower recall-related charges, higher wholesale volumes and cost performance. GMNA’s nine-month revenue increased 4.0%.
• GME’s nine-month adjusted loss narrowed to $515m from $976m, but it remained loss-making. GM announced it would cease manufacturing and Opel distribution in Russia and sharply reduce Chevrolet distribution by year-end 2015. Russia-related charges were approximately $450m in the first nine months; additional exit charges of up to $100m through 2016 were possible.
• GMIO nine-month adjusted EBIT rose to $989m from $826m, despite lower revenue and wholesale volumes. Management cited foreign-exchange and market pressures and warned that further deterioration could require impairment testing of long-lived assets; their carrying amount was $3.1bn.
• GMSA reported a nine-month adjusted loss of $575m versus $269m. Brazil’s industry sales fell 22.7% year over year in the first nine months; management said near-term conditions were not expected to improve and its prior expectation of improved 2015 adjusted results versus 2014 was no longer likely. Venezuela remeasurement and asset impairment charges were recorded in Q2 2015.
• Management forecast 2015 U.S. industry light-vehicle sales of 17.0–17.5m and expected GMNA adjusted margins of 10% for 2015, one year ahead of its prior target. The company’s longer-term target was consolidated adjusted margins of 9%–10% by the 2020s. It expected flat adjusted automotive free cash flow in 2015 versus 2014 and consolidated ROIC above 20%.
• Management expected European automotive industry conditions to improve moderately and GME to achieve positive adjusted EBIT in 2016. It expected low-single-digit China industry growth in 2015 and pricing pressure, including carryover price reductions 2%–3% above historical experience. GM Financial expected adjusted pretax income broadly consistent with 2014 in 2015 and more than double 2014 levels by 2018.
• GM’s capital allocation plan targets $20bn in combined cash and marketable securities, investment-grade credit, and reinvestment at an average target ROIC of at least 20%. A $5bn share repurchase program was underway; $2.9bn had been spent through September 30. All four cited credit agencies rated GM investment grade after Fitch’s June 2015 upgrade.

Risks, contingencies and unusual items

• GM entered a deferred prosecution agreement (DPA) related to the ignition-switch investigation, agreed to a $900m penalty and an independent monitor for three years, and consented to charges while pleading not guilty. Noncompliance could lead to prosecution or an extension of the deferral period.
• The company recorded approximately $1.5bn of Q3 charges, including the DPA penalty and settlements involving a shareholder class action and personal-injury claims. GM stated it could not estimate additional potential losses from unresolved recall-related litigation and investigations; further liabilities could materially affect results, financial position or cash flows.
• Other ongoing legal and regulatory exposures include ignition-switch and other recall claims, government investigations, GM Financial subprime lending and securitization inquiries, and Korean wage litigation. GM estimated reasonably possible losses above accruals in Korean wage matters of $488m for hourly employees and $151m for salaried employees. The filing also describes possible South American tax escrow deposits of $400m–$600m.
• The ignition-switch compensation program had a $190m liability at September 30. By October 16, 2015, approximately 300 eligible claimants had been paid $453m; 399 claims were determined eligible. Further product-liability accrual increases were possible, although management could not estimate a range.
• European deferred-tax-asset valuation allowances were $4.4bn. If sustained profitability and forecasts supported a changed assessment, GM said a significant reversal could benefit Q4 and full-year earnings, with a negative effective tax rate. The filing did not state that such a reversal was assured.
• Other significant uncertainties include foreign-exchange and economic volatility, especially in South America and Russia; China pricing and demand; restructuring execution; possible impairment charges; pension assumptions and funding; and UAW labor negotiations. The filing said disclosure controls were effective at September 30, 2015.

Investor verification points

• Reconcile the $1.5bn Q3 legal charge to its components, cash-payment timing and any subsequent settlements; track unresolved recall claims and DPA compliance.
• Assess whether GM’s cash, securities and facility availability support its $20bn liquidity target while funding investment, dividends, buybacks and legal obligations.
• Separate GM Financial’s expanding debt-funded leasing and receivables portfolio from automotive debt and evaluate credit quality, delinquencies and loss reserves.
• Test the durability of GMNA earnings and the stated 2015 margin and cash-flow outlook against pricing, mix, recall costs and market-share trends.
• Monitor potential European tax-allowance releases, GMIO impairment exposure, and continuing losses or restructuring costs in Europe, South America and Russia.