General Motors Company — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unless stated otherwise, amounts are U.S. dollars. GM designs, manufactures and sells vehicles and parts, provides financing through GM Financial, and invests in autonomous-vehicle development through GM Cruise.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales and revenue | $36.1 billion | $36.8 billion | $70.9 billion | $72.9 billion |
| Operating income | $2.49 billion | $1.48 billion | $3.73 billion | $2.01 billion |
| Net income attributable to stockholders | $2.42 billion | $2.39 billion | $4.58 billion | $3.44 billion |
| Diluted EPS, GAAP | $1.66 | $1.66 | $3.13 | $2.38 |
| Diluted EPS, adjusted | $1.64 | $1.81 | $3.04 | $3.24 |
Q2 consolidated operating margin was approximately 6.9%, calculated as operating income divided by revenue. First-half revenue declined 2.6%, while operating income rose; GAAP results included substantial Brazil indirect-tax recoveries and transformation costs. Adjusted EPS, which excludes specified items, declined year over year.
- Segments: Q2 adjusted EBIT was $3.02 billion at GMNA, a $48 million loss at GMI, and a $279 million loss at GM Cruise. GM Financial adjusted EBT was $536 million. GMNA adjusted EBIT margin was 10.7%; GMI margin was negative 1.2%.
- Cash flow: First-half consolidated operating cash flow was $5.0 billion versus $5.6 billion. Automotive operating cash flow was $1.6 billion versus $2.9 billion; automotive capital expenditures were $3.4 billion. Management reported a $0.5 billion adjustment for transformation-related management actions in its adjusted automotive free-cash-flow calculation.
- Liquidity: At June 30, cash and cash equivalents were $17.1 billion and marketable securities were $7.0 billion. Automotive cash and marketable securities were $17.5 billion, with $16.5 billion available under credit facilities. GM’s reported total available liquidity, including GM Cruise and credit facilities, was $37.0 billion. GM Financial separately reported $26.1 billion of available liquidity.
- Debt: Automotive debt, including finance leases, was $15.4 billion; GM Financial debt was $91.1 billion. The latter principally funds its receivables and leased-vehicle portfolio, including secured debt issued by securitization entities.
- Other balance-sheet items: Total assets were $233.7 billion, total liabilities $186.6 billion and total equity $47.1 billion. Inventory was $11.4 billion, up from $9.8 billion at year-end 2018.
Material changes versus prior comparable period
- Automotive revenue fell 3.5% in the first half, primarily reflecting lower wholesale volumes, especially in GMI; GM Financial revenue rose 5.2%.
- GMNA Q2 adjusted EBIT increased to $3.02 billion from $2.67 billion, supported by mix, pricing and cost savings. First-half adjusted EBIT was nearly flat at $4.92 billion.
- GMI moved to a first-half adjusted EBIT loss of $17 million from $332 million of income. Automotive China JV equity income declined to $611 million from $1.19 billion.
- GM Financial first-half adjusted EBT declined 8.6% to $895 million. Higher average debt and interest rates increased interest expense; loan-loss provision rose to $354 million from $264 million.
- First-half net income attributable to stockholders increased to $4.58 billion from $3.44 billion, while adjusted diluted EPS declined to $3.04 from $3.24. The comparison includes the Brazil tax recoveries and restructuring adjustments described below.
Outlook, commentary, risks and unusual items
- 2019 outlook: GM expects diluted GAAP EPS of $5.91–$6.75 and adjusted diluted EPS of $6.50–$7.00. It expects North American industry sales of approximately 17 million units and GMNA to sustain a strong adjusted EBIT margin. It expects China industry sales to decline year over year and China JV equity income in the second half to be generally in line with the first half.
- Transformation: GM targets approximately $6.0 billion of annual cash savings by end-2020, including approximately $4.5 billion of cost savings. Cumulative charges were $2.5 billion; management expected another $0.5–$1.1 billion of charges in the second half of 2019 and approximately $1.3 billion of additional cash outflows, substantially complete by end-2020.
- Brazil tax recoveries: GM recorded $857 million of pre-tax recovery in Q1 and $380 million in Q2, totaling $1.24 billion in the first half. Collection depends on administrative approvals and future tax liabilities eligible for offset; up to a further $100 million recovery was possible subject to judicial review.
- Market and operating risks: Management cited weaker markets, competitive and pricing pressure, emissions and fuel-economy regulation, foreign-exchange volatility, materials and tariff costs, trade-policy uncertainty, and risk related to China and joint ventures. The UAW contract was due to expire in September 2019; GM noted potential disruption risk. Used-vehicle prices were expected to fall 4%–5% for full-year 2019, creating residual-value exposure for GM Financial leases.
- Legal and contingent exposures: GM disclosed ongoing ignition-switch and other recall litigation and investigations, Takata-related matters, GM Korea wage and subcontractor claims, indirect-tax matters, and indemnification obligations associated with the former Opel/Vauxhall business. Estimated reasonably possible losses in excess of accruals included approximately $590 million and $160 million for two GM Korea wage matters, $140 million for certain potential subcontractor claims, up to $950 million for indirect-tax matters, and approximately $1.2 billion if specified U.S. Takata vehicles ultimately require repair. Some matters had no estimable loss range. Total litigation-related accruals were $1.4 billion.
- Other notable items: GM Cruise issued preferred shares for $1.1 billion, including $687 million invested by GM; the proceeds are designated for Cruise. GM had a $1.1 billion Lyft investment subject to market-price and transfer-restriction valuation risk. The filing reported no material changes to the risk factors in GM’s 2018 Form 10-K.
Important facts for investors to verify
- Whether GM meets its 2019 EPS guidance and realizes the targeted transformation savings without further material charges.
- How much of the Brazil tax recoveries is ultimately realized, and whether additional recoveries are approved.
- Whether lower China sales and JV earnings, foreign-exchange movements and pricing pressure persist.
- How automotive operating cash flow, working capital and capital spending evolve, given lower first-half automotive cash generation.
- Developments in recall, Takata, GM Korea wage, indirect-tax and Opel/Vauxhall-related contingencies, including exposures not currently estimable.
- GM Financial credit performance, loan-loss provisions, funding costs and used-vehicle residual values.
- Potential labor disruption around the UAW contract expiration and implications for production and cash flow.