General Motors (GM -0.09%) earned $2.9 billion in the second quarter, or $1.81 per share, powered by strong sales in the U.S. and China, and ongoing efficiency improvements around the world.
Excluding special items, GM earned $1.86 per share. That strongly exceeded Wall Street's $1.52 per share earnings estimate. Revenue of $42.4 billion was also far ahead of Wall Street's estimate of $38.9 billion.
The key numbers
|Metric||Q2 2016||Q2 2015|
|Revenue||$42.2 billion||$38.2 billion|
||2.4 million||2.4 million|
|EBIT-adjusted||$3.9 billion||$2.9 billion|
|Net income||$2.9 billion||$1.1 billion|
|Free cash flow||$3.2 billion||$3.3 billion|
|Return on invested capital||30.5%||23.4%|
"EBIT-adjusted" is GM's measurement for operating income excluding the effects of special items. The free cash flow totals shown are what GM reports as "adjusted automotive free cash flow", cash flow derived from its core automaking business (excluding its financial arm).
Strength in the U.S. and China powered GM's results
Simply put, GM's second-quarter result was outstanding -- all the more so because it wasn't driven by a huge increase in vehicle deliveries.
In fact, globally, GM's deliveries were roughly flat year over year. CFO Chuck Stevens said that good retail results in the U.S. and China were offset by challenging conditions in South America and parts of Asia, as well as GM's ongoing reduction in sales to U.S. rental-car fleets.
But despite flat delivery numbers, GM's generated record revenue of $42.4 billion, up 10% from a year ago. That was driven primarily by strong retail results in North America as well as growth at GM Financial. In an early morning briefing for reporters, Stevens pointed out that the pricing gains were due not only to GM's latest new products, but also in part to the ongoing strong demand for GM's pickup trucks and SUVs.
While much of GM's truck lineup is made up of what Stevens called "carryover products," meaning vehicles that aren't brand-new models, high demand (and GM's much-improved quality) has meant that GM has been able to sell those vehicles with minimal discounts. That made a big contribution to GM's outstanding global 9.3% pre-tax profit margin in the quarter.
The table below shows how each of GM's regional business units performed in the second quarter. Three things to note: GM's profit margin in North America was outstanding; it posted a profit in Europe that shows its restructuring efforts are beginning to pay off; and its results in China, while still strong, were down from a year ago, a drop that Stevens attributed in part to pricing pressures from stiffer competition in some segments.
|Business Unit||Q2 2016 Revenue
||Q2 2015 Revenue
||Q2 2016 Margin
||Q2 2015 Margin
|GM North America||$3.647 billion||$2.780 billion||12.1%||10.5%|
|GM Europe||$137 million||($45 million)||2.5%||(0.9%)|
|GM International Operations||$169 million||$349 million||6.0%||11.4%|
|Equity income from China joint ventures||$471 million||$503 million||9.5%||10.2%|
|GM South America||($121 million)||($144 million)||(7.4%)||(6.8%)|
GM Financial, the company's growing in-house financing arm, earned $266 million in the second quarter, up from $255 million a year ago. It captured 37% of GM's retail sales in the quarter, up from 33% in the second quarter of 2015.
GM paid less for Cruise Automation than we thought
Reports had suggested that GM paid as much as $1 billion to acquire San Francisco-based self-driving technology start-up Cruise Automation in the second quarter. Not so, said Stevens: It paid $581 million for Cruise at the deal's closing, half in cash and half in GM stock.
That's not the full cost of the deal, however: Stevens noted that GM is also on the hook for ongoing costs related to performance incentives and retention bonuses for former Cruise employees. Those costs will be treated as ongoing compensation expenses, he said.
Cash, debt, and GM's pension-fund liabilities
GM ended the second quarter with $20.1 billion in cash and equivalents, in line with its long-term cash-reserve target. It had an additional $14 billion in available credit facilities, for a total rainy-day fund of $34.1 billion. That's up from $32.5 billion at the end of 2015.
The automaker also said its global pension funds were underfunded by $18.1 billion as of the end of the second quarter, an improvement from the $21 billion they were down at the end of 2015.
GM's second-quarter results -- huge jumps in revenue and profit despite flat sales -- reflect CEO Mary Barra's ongoing effort to sustainably boost GM's global profitability through efficiency and pricing gains.
Back in 2014, Barra laid out a plan to increase GM's global EBIT-adjusted margins to between 9% and 10% by the early 2020s. Several components of that plan (most notably, a significant transformation of the luxury Cadillac brand) are still in their early stages, but GM was still able to hit Barra's aggressive margin target in the second quarter.
In part, that fat margin was achieved because of extremely favorable market conditions in North America. But Barra's plan to harvest more efficiencies from GM's global scale is also an important part of the story. Long story short, things could get even better from here.