General Motors Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unless noted, amounts are U.S. dollars; financial results exclude the European Business, which is presented as discontinued operations.
Business context and reporting period
GM designs, manufactures and sells vehicles and parts globally and provides financing through GM Financial. Its continuing reportable segments were GM North America (GMNA), GM International Operations (GMIO), GM South America (GMSA) and GM Financial. GM completed the sale of Opel/Vauxhall to PSA Group on July 31, 2017; the transfer of European financing subsidiaries (Fincos) remained subject to approvals and other closing conditions.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales and revenue | $33.6B | $38.9B | $107.9B | $109.3B |
| Operating income | $1.9B | $3.1B | $7.4B | $8.2B |
| Income from continuing operations | $0.1B | $2.7B | $5.2B | $7.4B |
| Net income (loss) attributable to stockholders | $(3.0)B | $2.8B | $1.3B | $7.6B |
| GAAP diluted EPS | $(2.03) | $1.76 | $0.85 | $4.81 |
| Adjusted EBIT | $2.5B | $3.7B | $9.8B | $10.3B |
| Adjusted diluted EPS | $1.32 | $1.71 | $4.97 | $4.76 |
Q3 adjusted EBIT margin was approximately 7.5% of revenue, compared with 9.4% a year earlier. GM’s Automotive China joint ventures contributed $459 million of equity income in Q3 and $1.5 billion in the first nine months.
- Cash flow: Nine-month net cash from operating activities was $10.4B, versus $12.6B in 2016; continuing operations provided $10.4B, versus $12.3B. Automotive cash provided by operating activities was $7.3B, down from $9.8B. Adjusted automotive free cash flow from continuing operations was $1.0B, versus $5.7B.
- Liquidity: At September 30, automotive available liquidity was $31.4B, including $17.3B cash and marketable securities and $14.1B available under credit facilities; it was $35.8B at year-end 2016. Consolidated cash and cash equivalents were $12.8B and marketable securities were $8.5B.
- Debt: Automotive debt was $13.6B, compared with $10.6B at December 31, 2016. GM Financial debt was $79.0B, versus $64.6B. GM Financial debt primarily funds its receivables and leased-vehicle portfolio.
- Other balance-sheet items: Total assets were $229.5B and total equity was $43.5B. Product warranty liabilities were $8.5B. Retained net underfunded European pension liabilities following the sale were $6.8B.
Material changes versus the prior comparable period
- Q3 revenue declined 13.5%, mainly reflecting lower automotive wholesale volumes, including planned production downtime and weaker passenger-car and rental-car volumes in North America. Nine-month revenue declined 1.3%.
- Q3 adjusted EBIT fell to $2.5B from $3.7B, principally on lower volumes and unfavorable pricing, partly offset by lower warranty costs and favorable mix. GMNA adjusted EBIT was $2.1B, down from $3.6B.
- GAAP net loss in Q3 primarily reflected the European disposal and related tax effects. GM recorded a $5.4B Q3 charge associated with the Opel/Vauxhall sale; $3.1B was reported in discontinued operations and $2.3B in income tax expense. The total expected sale-related charge was approximately $6.3B, net of tax.
- GM Financial revenue increased 33.9% in Q3 to $3.2B and adjusted pretax earnings rose 60.6% to $310M, primarily due to growth in its lease portfolio. Its North American retail penetration reached approximately 40%, compared with 33% a year earlier.
- Automotive available liquidity declined $4.4B from year-end 2016. Uses included $3.4B of payments related to pension liabilities assumed by PSA Group and $4.7B returned to shareholders through dividends and repurchases, partly offset by operating cash flow and $3.0B of new notes.
Guidance, management commentary and risks
- For 2017, management expected revenue, adjusted EBIT and adjusted EBIT margins generally in line with 2016; adjusted ROIC above 25%; automotive operating cash flow from continuing operations of approximately $14B; and adjusted automotive free cash flow from continuing operations of approximately $6B.
- 2017 diluted GAAP EPS guidance was $1.66–$2.16; adjusted diluted EPS guidance was $6.00–$6.50, with management expecting a result in the middle of that range. The guidance includes significant European-sale and tax adjustments.
- Management cited a more challenging operating environment than initially expected, rising raw-material costs, lower passenger-car demand and North American pricing pressure. It targeted 9%–10% adjusted EBIT margins by early next decade and $6.5B in cumulative annual operating and functional cost savings through 2018 versus 2014; more than $5B had been realized by September 30, 2017.
- GM said the Fincos transfer was expected by year-end, subject to approvals, and expected an additional disposal loss of approximately $300M on their sale. GM also retained indemnification obligations to PSA Group for specified matters.
- Contingencies: GM disclosed continuing ignition-switch and related recall litigation and investigations, with additional liabilities possible but not estimable overall. Potential U.S. Takata repair costs were estimated at approximately $1.0B if repairs are ultimately required; no provision was recorded for the vehicles covered by GM’s petitions. Other disclosed exposures include reasonably possible excess losses of approximately $547M for GM Korea hourly wage cases, $169M for salaried wage cases and up to approximately $1.0B for indirect-tax matters. A possible Brazilian tax recovery of up to $1.5B was not recorded and remained uncertain.
- Management identified market and competitive pressures, regulation and emissions requirements, recalls and litigation, foreign-exchange and political risks, pension obligations, supplier continuity, and the pending Fincos transaction as risks. It reported no material change to the risk factors in its 2016 Form 10-K and stated disclosure controls were effective.
Most important facts for investors to verify
- How much of the reported Q3 and year-to-date earnings decline reflects the Opel/Vauxhall disposal and deferred-tax valuation allowance, versus continuing operating performance.
- Completion timing and final proceeds for the Fincos sale, and any further disposal loss or indemnity-related costs.
- Whether management achieved its 2017 adjusted EPS, operating cash flow and free-cash-flow outlook, and how automotive cash generation and liquidity developed.
- Trends in GMNA volume, pricing, warranty costs and margins, as well as GM Financial credit losses, used-vehicle residual values and funding costs.
- Developments in ignition-switch, Takata, wage and indirect-tax matters, including any changes to accruals or reasonably possible losses.