filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the accompanying audited consolidated financial statements and notes. Forward-looking statements in this MD&A are not guarantees of future performance and may involve risks and uncertainties that could cause actual results to differ materially from those projected. Refer to the "Forward-Looking Statements" section of this MD&A and Item 1A. Risk Factors for a discussion of these risks and uncertainties.
Non-GAAP Measures Unless otherwise indicated, our non-GAAP measures discussed in this MD&A are related to our continuing operations and not our discontinued operations. Our non-GAAP measures include: earnings before interest and taxes (EBIT)-adjusted, presented net of noncontrolling interests; Core EBIT-adjusted; earnings per share (EPS)-diluted-adjusted; effective tax rate-adjusted (ETR-adjusted); return on invested capital-adjusted (ROIC-adjusted) and adjusted automotive free cash flow. Our calculation of these non-GAAP measures may not be comparable to similarly titled measures of other companies due to potential differences between companies in the method of calculation. As a result, the use of these non-GAAP measures has limitations and should not be considered superior to, in isolation from, or as a substitute for, related U.S. GAAP measures.
These non-GAAP measures allow management and investors to view operating trends, perform analytical comparisons and benchmark performance between periods and among geographic regions to understand operating performance without regard to items we do not consider a component of our core operating performance. Furthermore, these non-GAAP measures allow investors the opportunity to measure and monitor our performance against our externally communicated targets and evaluate the investment decisions being made by management to improve ROIC-adjusted. Management uses these measures in its financial, investment and operational decision-making processes, for internal reporting and as part of its forecasting and budgeting processes. Further, our Board of Directors uses certain of these and other measures as key metrics to determine management performance under our performance-based compensation plans. For these reasons we believe these non-GAAP measures are useful for our investors.
EBIT-adjusted EBIT-adjusted is presented net of noncontrolling interests and is used by management and can be used by investors to review our consolidated operating results because it excludes automotive interest income, automotive interest expense and income taxes as well as certain additional adjustments that are not considered part of our core operations. Examples of adjustments to EBIT include but are not limited to impairment charges on long-lived assets and other exit costs resulting from strategic shifts in our operations or discrete market and business conditions; costs arising from the ignition switch recall and related legal matters; and certain currency devaluations associated with hyperinflationary economies. For EBIT-adjusted and our other non-GAAP measures, once we have made an adjustment in the current period for an item, we will also adjust the related non-GAAP measure in any future periods in which there is an impact from the item.
Core EBIT-adjusted Core EBIT-adjusted is used by management and can be used by investors to review our core consolidated operating results. Core EBIT-adjusted begins with EBIT-adjusted and excludes the EBIT-adjusted results of GM Cruise. Prior to the three months ended June 30, 2018 Core EBIT-adjusted excluded the EBIT-adjusted results of autonomous vehicle operations, including GM Cruise, Maven and our investment in Lyft, Inc. (Lyft). The measure was changed to align with segment reporting. All periods presented have been recast to reflect the changes.
EPS-diluted-adjusted EPS-diluted-adjusted is used by management and can be used by investors to review our consolidated diluted EPS results on a consistent basis. EPS-diluted-adjusted is calculated as net income attributable to common stockholders-diluted less income (loss) from discontinued operations on an after-tax basis, adjustments noted above for EBIT-adjusted and certain income tax adjustments divided by weighted-average common shares outstanding-diluted. Examples of income tax adjustments include the establishment or reversal of significant deferred tax asset valuation allowances.
ETR-adjusted ETR-adjusted is used by management and can be used by investors to review the consolidated effective tax rate for our core operations on a consistent basis. ETR-adjusted is calculated as Income tax expense less the income tax related to the adjustments noted above for EBIT-adjusted and the income tax adjustments noted above for EPS-diluted-adjusted divided by Income before income taxes less adjustments.
ROIC-adjusted ROIC-adjusted is used by management and can be used by investors to review our investment and capital allocation decisions. We define ROIC-adjusted as EBIT-adjusted for the trailing four quarters divided by ROIC-adjusted average net assets, which is considered to be the average equity balances adjusted for average automotive debt and interest liabilities, exclusive of capital leases; average automotive net pension and other postretirement benefits (OPEB) liabilities; and average
GENERAL MOTORS COMPANY AND SUBSIDIARIES
automotive net income tax assets during the same period. Adjustments to the average equity balances exclude assets and liabilities classified as either assets held for sale or liabilities held for sale.
Adjusted automotive free cash flow Adjusted automotive free cash flow is used by management and can be used by investors to review the liquidity of our automotive operations and to measure and monitor our performance against our capital allocation program and evaluate our automotive liquidity against the substantial cash requirements of our automotive operations. We measure adjusted automotive free cash flow as automotive operating cash flow from continuing operations less capital expenditures adjusted for management actions. Management actions can include voluntary events such as discretionary contributions to employee benefit plans or nonrecurring specific events such as a closure of a facility that are considered special for EBIT-adjusted purposes. Refer to the “Liquidity and Capital Resources” section of this MD&A for additional information.
The following table reconciles Net income (loss) attributable to stockholders under U.S. GAAP to EBIT-adjusted:
| Years Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Net income (loss) attributable to stockholders | $ | 8,014 | $ | (3,864 | ) | $ | 9,427 | ||||
| Loss from discontinued operations, net of tax | 70 | 4,212 | 1 | ||||||||
| Income tax expense | 474 | 11,533 | 2,739 | ||||||||
| Automotive interest expense | 655 | 575 | 563 | ||||||||
| Automotive interest income | (335 | ) | (266 | ) | (182 | ) | |||||
| Adjustments | |||||||||||
| Transformation activities(a) | 1,327 | — | — | ||||||||
| GMI restructuring(b) | 1,138 | 540 | — | ||||||||
| Ignition switch recall and related legal matters(c) | 440 | 114 | 300 | ||||||||
| Total adjustments | 2,905 | 654 | 300 | ||||||||
| EBIT-adjusted | $ | 11,783 | $ | 12,844 | $ | 12,848 |
| (a) | These adjustments were excluded because of a strategic decision to accelerate our transformation for the future to strengthen our core business, capitalize on the future of personal mobility, and drive significant cost efficiencies. The adjustments primarily consist of employee separation charges and accelerated depreciation. |
| (b) | These adjustments were excluded because of a strategic decision to rationalize our core operations by exiting or significantly reducing our presence in various international markets to focus resources on opportunities expected to deliver higher returns. The adjustments primarily consist of employee separation charges, asset impairments and supplier claims in the year ended December 31, 2018, all in Korea. The adjustment in the year ended December 31, 2017 primarily consists of asset impairments and other restructuring actions in India, South Africa and Venezuela. |
| (c) | These adjustments were excluded because of the unique events associated with the ignition switch recall, which included various investigations, inquiries and complaints from constituents. |
The following table reconciles EBIT-adjusted to Core EBIT-adjusted:
| Years Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| EBIT-adjusted(a) | $ | 11,783 | $ | 12,844 | $ | 12,848 | |||||
| EBIT loss-adjusted – GM Cruise | 728 | 613 | 171 | ||||||||
| Core EBIT-adjusted | $ | 12,511 | $ | 13,457 | $ | 13,019 |
| (a) | Refer to the reconciliation of Net income (loss) attributable to stockholders under U.S. GAAP to EBIT-adjusted within this section of the MD&A. |
GENERAL MOTORS COMPANY AND SUBSIDIARIES
The following table reconciles diluted earnings (loss) per common share under U.S. GAAP to EPS-diluted-adjusted:
| Years Ended December 31, | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||||||
| Amount | Per Share | Amount | Per Share | Amount | Per Share | ||||||||||||||||||
| Diluted earnings (loss) per common share | $ | 7,916 | $ | 5.53 | $ | (3,880 | ) | $ | (2.60 | ) | $ | 9,427 | $ | 6.00 | |||||||||
| Diluted loss per common share – discontinued operations | 70 | 0.05 | 4,212 | 2.82 | 1 | — | |||||||||||||||||
| Adjustments(a) | 2,905 | 2.03 | 654 | 0.44 | 300 | 0.19 | |||||||||||||||||
| Tax effect on adjustments(b) | (416 | ) | (0.29 | ) | (208 | ) | (0.14 | ) | (114 | ) | (0.07 | ) | |||||||||||
| Tax adjustments(c) | (1,111 | ) | (0.78 | ) | 9,099 | 6.10 | — | — | |||||||||||||||
| EPS-diluted-adjusted | $ | 9,364 | $ | 6.54 | $ | 9,877 | $ | 6.62 | $ | 9,614 | $ | 6.12 |
| (a) | Refer to the reconciliation of Net income (loss) attributable to stockholders under U.S. GAAP to EBIT-adjusted within this section of the MD&A for adjustment details. |
| (b) | The tax effect of each adjustment is determined based on the tax laws and valuation allowance status of the jurisdiction to which the adjustment relates. |
| (c) | In the year ended December 31, 2018 the adjustment consists of: (1) a non-recurring tax benefit related to foreign earnings; and (2) tax effects related to U.S. tax reform legislation. In the year ended December 31, 2017 the adjustment consisted of the tax expense of $7.3 billion related to U.S. tax reform legislation and the establishment of a valuation allowance against deferred tax assets of $2.3 billion that are no longer realizable as a result of the sale of the Opel/Vauxhall Business, partially offset by tax benefits related to tax settlements. These adjustments were excluded because impacts of tax legislation and valuation allowances are not considered part of our core operations. |
The following table reconciles our effective tax rate under U.S. GAAP to ETR-adjusted:
| Years Ended December 31, | ||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||
| Income before income taxes | Income tax expense | Effective tax rate | Income before income taxes | Income tax expense | Effective tax rate | Income before income taxes | Income tax expense | Effective tax rate | ||||||||||||||||||||||||
| Effective tax rate | $ | 8,549 | $ | 474 | 5.5 | % | $ | 11,863 | $ | 11,533 | 97.2 | % | $ | 12,008 | $ | 2,739 | 22.8 | % | ||||||||||||||
| Adjustments(a) | 2,946 | 416 | 654 | 208 | 300 | 114 | ||||||||||||||||||||||||||
| Tax adjustments(b) | 1,111 | (9,099 | ) | — | ||||||||||||||||||||||||||||
| ETR-adjusted | $ | 11,495 | $ | 2,001 | 17.4 | % | $ | 12,517 | $ | 2,642 | 21.1 | % | $ | 12,308 | $ | 2,853 | 23.2 | % |
| (a) | Refer to the reconciliation of Net income (loss) attributable to stockholders under U.S. GAAP to EBIT-adjusted within this section of the MD&A for adjustment details. Net income attributable to noncontrolling interests for these adjustments is included in the year ended December 31, 2018. |
| (b) | Refer to the reconciliation of diluted earnings (loss) per common share under U.S. GAAP to EPS-diluted-adjusted within this section of the MD&A for adjustment details. |
We define return on equity (ROE) as Net income (loss) attributable to stockholders for the trailing four quarters divided by average equity for the same period. Management uses average equity to provide comparable amounts in the calculation of ROE. The following table summarizes the calculation of ROE (dollars in billions):
| Years Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Net income (loss) attributable to stockholders | $ | 8.0 | $ | (3.9 | ) | $ | 9.4 | ||||
| Average equity(a) | $ | 37.4 | $ | 42.2 | $ | 43.6 | |||||
| ROE | 21.4 | % | (9.2 | )% | 21.6 | % |
| (a) | Includes equity of noncontrolling interests where the corresponding earnings (loss) are included in Net income (loss) attributable to stockholders. |
GENERAL MOTORS COMPANY AND SUBSIDIARIES
The following table summarizes the calculation of ROIC-adjusted (dollars in billions):
| Years Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| EBIT-adjusted(a) | $ | 11.8 | $ | 12.8 | $ | 12.8 | |||||
| Average equity(b) | $ | 37.4 | $ | 42.2 | $ | 43.6 | |||||
| Add: Average automotive debt and interest liabilities (excluding capital leases) | 14.4 | 11.6 | 9.9 | ||||||||
| Add: Average automotive net pension & OPEB liability | 18.3 | 21.0 | 22.0 | ||||||||
| Less: Average automotive net income tax asset | (22.7 | ) | (29.3 | ) | (32.8 | ) | |||||
| ROIC-adjusted average net assets | $ | 47.4 | $ | 45.5 | $ | 42.7 | |||||
| ROIC-adjusted | 24.9 | % | 28.2 | % | 30.1 | % |
| (a) | Refer to the reconciliation of Net income (loss) attributable to stockholders under U.S. GAAP to EBIT-adjusted within this section of the MD&A. |
| (b) | Includes equity of noncontrolling interests where the corresponding earnings (loss) are included in EBIT-adjusted. |
Overview Our management team has adopted a strategic plan to transform GM into the world's most valued automotive company. Our plan includes several major initiatives that we anticipate will redefine the future of personal mobility through our zero crashes, zero emissions, zero congestion vision while also strengthening the core of our business: earning customers for life by delivering winning vehicles, leading the industry in quality and safety and improving the customer ownership experience; leading in technology and innovation, including electrification, autonomous, data connectivity; growing our brands; making tough, strategic decisions about which markets and products in which we will invest and compete; building profitable adjacent businesses and targeting 10% core margins on an EBIT-adjusted basis.
In addition to our EBIT-adjusted margin improvement goal, through 2018 we fully realized our financial targets of $6.5 billion in total annual operational and functional cost savings compared to 2014 costs.
For the year ending December 31, 2019 we expect EPS-diluted of between $5.17 and $6.00 and EPS-diluted-adjusted of between $6.50 and $7.00. The following table reconciles expected EPS-diluted under U.S. GAAP to expected EPS-diluted-adjusted and includes the future impact of the expected adjustment related to transformation activities:
| Year Ending December 31, 2019 | |
| Diluted earnings per common share | $ 5.17-6.00 |
| Adjustment – transformation activities | 1.17-1.59 |
| Tax effect on adjustment(a) | (0.17-0.26) |
| EPS-diluted-adjusted | $ 6.50-7.00 |
| (a) | The tax effect of the adjustment is determined based on the tax laws and valuation allowance status of the jurisdiction to which the adjustment relates. |
We face continuing market, operating and regulatory challenges in a number of countries across the globe due to, among other factors, weak economic conditions, competitive pressures, our product portfolio offerings, heightened emissions standards, foreign exchange volatility, rising materials prices, trade policy and political uncertainty. As a result of these conditions, we continue to strategically assess our performance and ability to achieve acceptable returns on our invested capital, as well as our cost structure in order to maintain a low breakeven point. Refer to Item 1A. Risk Factors for a discussion of these challenges. We expect transformation activities to drive approximately $6.0 billion of annual cash savings by the end of 2020, resulting from reductions in Automotive and other cost of sales in our consolidated financial statements, as well as reduced capital expenditures. This target includes approximately $4.5 billion of cost savings, to be achieved through staffing, manufacturing and product initiatives. As we continue to assess our performance and the needs of our evolving business, additional restructuring and rationalization actions could be required. These additional actions could give rise to future asset impairments or other charges which may have a material impact on our results of operations.
GENERAL MOTORS COMPANY AND SUBSIDIARIES
GMNA Industry sales in North America were 21.5 million units in the year ended December 31, 2018 representing a decrease of 0.1% compared to the corresponding period in 2017. U.S. industry sales were 17.7 million units in the year ended December 31, 2018.
Our total vehicle sales in the U.S., our largest market in North America, totaled 3.0 million units for market share of 16.7% in the year ended December 31, 2018 representing a decrease of 0.4 percentage points compared to the corresponding period in 2017. We continue to lead the U.S. industry in market share.
In November 2018 we announced plans to accelerate steps to improve our overall business performance including the reorganization of global product development staffs, the realignment of manufacturing capacity in response to market-related volume declines in passenger cars and a reduction of our salaried workforce. We recorded charges of $1.2 billion in the year ended December 31, 2018 and expect to record additional charges of $1.5 billion to $2.0 billion in 2019. These charges are primarily considered special for EBIT-adjusted, EPS diluted-adjusted, and adjusted automotive free cash flow purposes.
We estimate GMNA's breakeven point at the U.S. industry level to be in the range of 10.0 to 11.0 million units. We expect to sustain a strong EBIT-adjusted margin in 2019 on continued strength of the U.S. industry light vehicle sales, favorable vehicle mix and continued focus on overall cost savings partially offset by higher costs associated with commodities and tariffs, as well as pricing pressures.
The UAW contract ratified in November 2015 expires in September 2019. For discussion of the risks related to a significant labor disruption at one of our facilities, refer to Item 1A. Risk Factors.
GMI Industry sales in China were 26.5 million units in the year ended December 31, 2018 representing a decrease of 6.3% compared to the corresponding period in 2017. Our total vehicle sales in China were 3.6 million units for a market share of 13.8% in the year ended December 31, 2018, representing a decrease of 0.5 percentage points compared to the corresponding period in 2017. We continue to see strength in sales of our Cadillac vehicles, and Chevrolet outperformed the passenger vehicle industry. Baojun and Wuling sales were impacted by the market slowdown in less developed cities and market shift away from mini commercial vehicles. Our Automotive China JVs generated equity income of $2.0 billion in the year ended December 31, 2018. In 2019 we expect industry sales to remain relatively flat with a continuation of pricing pressures, a more challenging regulatory environment related to emissions, fuel consumption and new energy vehicles as well as a weaker Chinese Yuan against the U.S. Dollar, which will continue to put pressure on our operations in China. While we expect China equity income to be moderately down, we expect to sustain strong China equity income by focusing on improvements in vehicle mix, cost efficiencies, and downstream performance optimization.
Outside of China, many markets across the segment continue to improve, resulting in industry sales of 26.7 million units, representing an increase of 5.0% in the year ended December 31, 2018 compared to the corresponding period in 2017. This increase was due primarily to increases in India and Brazil. Our total vehicle sales were 1.2 million units for a market share of 4.7% in the year ended December 31, 2018, representing a decrease of 0.4 percentage points compared to the corresponding period in 2017.
In February 2018 we announced the closure of a facility and other restructuring actions in Korea. We recorded charges of $1.1 billion consisting of $0.6 billion in non-cash asset impairments and other charges and $0.5 billion in employee separation charges in the year ended December 31, 2018. We incurred $0.8 billion in cash outflows resulting from these Korea restructuring actions for employee separations and statutory pension payments in the year ended December 31, 2018. The charges are considered special for EBIT-adjusted, EPS-diluted-adjusted and adjusted automotive free cash flow reporting purposes. Refer to Note 18 to our consolidated financial statements for information related to these restructuring actions.
In connection with these restructuring actions, the Korea Development Bank (KDB) purchased approximately $0.7 billion of GM Korea Company's (GM Korea) Class B Preferred Shares from GM Korea (GM Korea Preferred Shares) in 2018. In conjunction with the GM Korea Preferred Share issuance we agreed to provide GM Korea future funding, if needed, not to exceed $2.8 billion through December 31, 2027, inclusive of $2.0 billion of planned capital expenditures through 2027. The actions being taken to address GM Korea's financial and operational performance have and may continue to result in litigation, negative publicity, business disruption, and labor unrest. Refer to Note 20 to our consolidated financial statements for additional information.
GM Cruise In June 2018 GM Cruise Holdings issued $0.9 billion of convertible preferred shares (GM Cruise Preferred Shares) to SoftBank Investments Holdings (UK) Limited (SoftBank). Immediately prior to the issuance of the GM Cruise Preferred Shares, we invested $1.1 billion in GM Cruise Holdings. When GM Cruise's autonomous vehicles are ready for commercial deployment, SoftBank is obligated to purchase additional GM Cruise Preferred Shares for $1.35 billion, subject to regulatory approval. All
GENERAL MOTORS COMPANY AND SUBSIDIARIES
proceeds are designated exclusively for working capital and general corporate purposes of GM Cruise. Refer to Note 20 to our consolidated financial statements for additional information.
In October 2018 GM Cruise Holdings issued $0.75 billion of GM Cruise Holdings Class E Common Shares to Honda, representing 5.7% of the fully diluted equity of GM Cruise Holdings at closing. In addition, Honda agreed to contribute approximately $2.0 billion primarily in the form of a long-term annual fee to GM Cruise Holdings for certain rights to use GM Cruise Holdings' trade names and trademarks and the exclusive right to partner with GM Cruise Holdings to develop, deploy and maintain a foreign market. The remaining contribution or funding will come in the form of shared development costs for a SAV that Honda, General Motors Holdings LLC and GM Cruise Holdings will jointly develop for deployment onto GM Cruise's autonomous vehicle network. All proceeds are designated exclusively for working capital and general corporate purposes of GM Cruise. Refer to Note 20 to our consolidated financial statements for additional information.
Corporate Beginning in 2012 through January 25, 2019, we purchased an aggregate of 510 million shares of our outstanding common stock for $16.4 billion.
The ignition switch recall has led to various inquiries, investigations, subpoenas, requests for information and complaints from agencies or other representatives of U.S., federal, state and Canadian governments. In addition these and other recalls have resulted in a number of claims and lawsuits. Such lawsuits and investigations could in the future result in the imposition of material damages, fines, civil consent orders, civil and criminal penalties or other remedies. Refer to Note 16 to our consolidated financial statements for additional information.
Takata Matters In May 2016 NHTSA issued an amended consent order requiring Takata to file defect information reports (DIRs) for previously unrecalled front airbag inflators that contain phased-stabilized ammonium nitrate-based propellant without a moisture absorbing desiccant on a multi-year, risk-based schedule through 2019 impacting tens of millions of vehicles produced by numerous automotive manufacturers. NHTSA concluded that the likely root cause of the rupturing of the airbag inflators is a function of time, temperature cycling and environmental moisture.
Although we do not believe there is a safety defect at this time in any unrecalled GM vehicles within scope of the Takata DIRs, in cooperation with NHTSA we have filed Preliminary DIRs covering certain of our GMT900 vehicles, which are full-size pickup trucks and SUVs. We have also filed petitions for inconsequentiality with respect to the vehicles subject to those Preliminary DIRs. NHTSA has consolidated our petitions and will rule on them at the same time.
While these petitions have been pending, we have provided NHTSA with the results of our long-term studies and the studies performed by third-party experts, all of which form the basis for our determination that the inflators in these vehicles do not present an unreasonable risk to safety and that no repair should ultimately be required.
We believe these vehicles are currently performing as designed and our inflator aging studies and field data support the belief that the vehicles' unique design and integration mitigates against inflator propellant degradation and rupture risk. For example, the airbag inflators used in the vehicles are a variant engineered specifically for our vehicles, and include features such as greater venting, unique propellant wafer configurations, and machined steel end caps. The inflators are packaged in the instrument panel in such a way as to minimize exposure to moisture from the climate control system. Also, these vehicles have features that minimize the maximum temperature to which the inflator will be exposed, such as larger interior volumes and standard solar absorbing windshields and side glass.
Accordingly, no warranty provision has been made for any repair associated with our vehicles subject to the Preliminary DIRs and amended consent order. However, in the event we are ultimately obligated to repair the vehicles subject to current or future Takata DIRs under the amended consent order in the U.S., we estimate a reasonably possible impact to GM of approximately $1.2 billion.
GM has recalled certain vehicles sold outside of the U.S. to replace Takata inflators in those vehicles. There are significant differences in vehicle and inflator design between the relevant vehicles sold internationally and those sold in the U.S. We continue to gather and analyze evidence about these inflators and to share our findings with regulators. Additional recalls, if any, could be material to our results of operations and cash flows. We continue to monitor the international situation.
Contingently Issuable Shares Under the Amended and Restated Master Sale and Purchase Agreement between us and MLC, GM may be obligated to issue Adjustment Shares of our common stock if allowed general unsecured claims against the GUC
GENERAL MOTORS COMPANY AND SUBSIDIARIES
Trust, as estimated by the Bankruptcy Court, exceed $35.0 billion. Refer to Note 16 to our consolidated financial statements for a description of the contingently issuable Adjustment Shares.
Automotive Financing - GM Financial Summary and Outlook We believe that offering a comprehensive suite of financing products will generate incremental sales of our vehicles, drive incremental GM Financial earnings and help support our sales throughout various economic cycles. The expansion of GM Financial's leasing program results in increased exposure to residual values, which are heavily dependent on used vehicle prices. Used vehicle prices in 2018 held at similar levels as compared to 2017. We expect a decrease of 4% to 5% in 2019 compared to 2018, due primarily to continued increases in the industry supply of used vehicles. The following table summarizes the residual value as well as the number of units included in GM Financial equipment on operating leases, net by vehicle type (units in thousands):
| December 31, 2018 | December 31, 2017 | ||||||||||||||||||
| Residual Value | Units | Percentage | Residual Value | Units | Percentage | ||||||||||||||
| Cars | $ | 4,884 | 379 | 22.3 | % | $ | 5,701 | 450 | 27.2 | % | |||||||||
| Trucks | 7,299 | 296 | 17.4 | % | 7,173 | 285 | 17.3 | % | |||||||||||
| Crossovers | 15,057 | 917 | 53.8 | % | 13,723 | 818 | 49.5 | % | |||||||||||
| SUVs | 4,160 | 111 | 6.5 | % | 3,809 | 99 | 6.0 | % | |||||||||||
| Total | $ | 31,400 | 1,703 | 100.0 | % | $ | 30,406 | 1,652 | 100.0 | % |
During 2018 GM Financial continued to expand its prime lending programs in North America. Accordingly, GM Financial's retail penetration in North America increased to approximately 47% in the year ended December 31, 2018 from approximately 37% in 2017, due primarily to further alignment with GM and greater dealer engagement. GM Financial's prime loan originations as a percentage of total loan originations in North America increased to 72% in 2018 from 61% in 2017. In the year ended December 31, 2018 GM Financial's revenue consisted of leased vehicle income of 71%, retail finance charge income of 22%, and commercial finance charge income of 4%.
Consolidated Results We review changes in our results of operations under five categories: volume, mix, price, cost and other. Volume measures the impact of changes in wholesale vehicle volumes driven by industry volume, market share and changes in dealer stock levels. Mix measures the impact of changes to the regional portfolio due to product, model, trim, country and option penetration in current year wholesale vehicle volumes. Price measures the impact of changes related to Manufacturer’s Suggested Retail Price and various sales allowances. Cost includes primarily: (1) material and freight; (2) manufacturing, engineering, advertising, administrative and selling and warranty expense; and (3) non-vehicle related activity. Other includes primarily foreign exchange and non-vehicle related automotive revenues as well as equity income or loss from our nonconsolidated affiliates. Refer to the regional sections of this MD&A for additional information. We adopted Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers," as amended (ASU 2014-09) on a modified retrospective basis effective January 1, 2018. The impacts of the new standard are reflected in this MD&A. Refer to Note 2 of our consolidated financial statements or additional information.
Total Net Sales and Revenue
| Years Ended December 31, | Favorable/ (Unfavorable) | Variance Due To | |||||||||||||||||||||||||||||
| 2018 | 2017 | % | Volume | Mix | Price | Other | |||||||||||||||||||||||||
| (Dollars in billions) | |||||||||||||||||||||||||||||||
| GMNA | $ | 113,792 | $ | 111,345 | $ | 2,447 | 2.2 | % | $ | 1.4 | $ | (0.7 | ) | $ | 1.4 | $ | 0.3 | ||||||||||||||
| GMI | 19,148 | 21,920 | (2,772 | ) | (12.6 | )% | $ | (1.7 | ) | $ | (0.2 | ) | $ | 0.4 | $ | (1.2 | ) | ||||||||||||||
| Corporate | 203 | 342 | (139 | ) | (40.6 | )% | $ | (0.1 | ) | ||||||||||||||||||||||
| Automotive | 133,143 | 133,607 | (464 | ) | (0.3 | )% | $ | (0.3 | ) | $ | (0.9 | ) | $ | 1.8 | $ | (1.0 | ) | ||||||||||||||
| GM Financial | 14,016 | 12,151 | 1,865 | 15.3 | % | $ | 1.9 | ||||||||||||||||||||||||
| Eliminations | (110 | ) | (170 | ) | 60 | 35.3 | % | $ | (0.1 | ) | $ | 0.1 | |||||||||||||||||||
| Total net sales and revenue | $ | 147,049 | $ | 145,588 | $ | 1,461 | 1.0 | % | $ | (0.3 | ) | $ | (0.9 | ) | $ | 1.8 | $ | 1.0 |
GENERAL MOTORS COMPANY AND SUBSIDIARIES
| Years Ended December 31, | Favorable/ (Unfavorable) | Variance Due To | |||||||||||||||||||||||||||||
| 2017 | 2016 | % | Volume | Mix | Price | Other | |||||||||||||||||||||||||
| (Dollars in billions) | |||||||||||||||||||||||||||||||
| GMNA | $ | 111,345 | $ | 119,113 | $ | (7,768 | ) | (6.5 | )% | $ | (12.2 | ) | $ | 3.5 | $ | 0.6 | $ | 0.3 | |||||||||||||
| GMI | 21,920 | 20,943 | 977 | 4.7 | % | $ | 0.2 | $ | 0.2 | $ | 0.6 | $ | — | ||||||||||||||||||
| Corporate | 342 | 149 | 193 | n.m. | $ | 0.2 | |||||||||||||||||||||||||
| Automotive | 133,607 | 140,205 | (6,598 | ) | (4.7 | )% | $ | (12.0 | ) | $ | 3.7 | $ | 1.3 | $ | 0.5 | ||||||||||||||||
| GM Financial | 12,151 | 8,983 | 3,168 | 35.3 | % | $ | 3.2 | ||||||||||||||||||||||||
| Eliminations | (170 | ) | (4 | ) | (166 | ) | n.m. | $ | (0.2 | ) | |||||||||||||||||||||
| Total net sales and revenue | $ | 145,588 | $ | 149,184 | $ | (3,596 | ) | (2.4 | )% | $ | (12.0 | ) | $ | 3.7 | $ | 1.3 | $ | 3.5 |
n.m. = not meaningful
Automotive and Other Cost of Sales
| Years Ended December 31, | Favorable/ (Unfavorable) | Variance Due To | |||||||||||||||||||||||||||||
| 2018 | 2017 | % | Volume | Mix | Cost | Other | |||||||||||||||||||||||||
| (Dollars in billions) | |||||||||||||||||||||||||||||||
| GMNA | $ | 99,445 | $ | 94,193 | $ | (5,252 | ) | (5.6 | )% | $ | (1.0 | ) | $ | (0.9 | ) | $ | (3.5 | ) | $ | 0.1 | |||||||||||
| GMI | 20,418 | 21,478 | 1,060 | 4.9 | % | $ | 1.4 | $ | 0.3 | $ | (1.2 | ) | $ | 0.5 | |||||||||||||||||
| Corporate | 178 | 129 | (49 | ) | (38.0 | )% | $ | — | $ | 0.2 | $ | (0.2 | ) | ||||||||||||||||||
| GM Cruise | 715 | 592 | (123 | ) | (20.8 | )% | $ | (0.1 | ) | ||||||||||||||||||||||
| Eliminations | (100 | ) | (163 | ) | (63 | ) | (38.7 | )% | $ | 0.1 | $ | (0.1 | ) | ||||||||||||||||||
| Total automotive and other cost of sales | $ | 120,656 | $ | 116,229 | $ | (4,427 | ) | (3.8 | )% | $ | 0.5 | $ | (0.5 | ) | $ | (4.8 | ) | $ | 0.4 |
| Years Ended December 31, | Favorable/ (Unfavorable) | Variance Due To | |||||||||||||||||||||||||||||
| 2017 | 2016 | % | Volume | Mix | Cost | Other | |||||||||||||||||||||||||
| (Dollars in billions) | |||||||||||||||||||||||||||||||
| GMNA | $ | 94,193 | $ | 101,073 | $ | 6,880 | 6.8 | % | $ | 8.7 | $ | (2.7 | ) | $ | 1.1 | $ | (0.3 | ) | |||||||||||||
| GMI | 21,478 | 20,459 | (1,019 | ) | (5.0 | )% | $ | (0.1 | ) | $ | (0.5 | ) | $ | (0.1 | ) | $ | (0.3 | ) | |||||||||||||
| Corporate | 129 | 85 | (44 | ) | (51.8 | )% | $ | — | $ | (0.2 | ) | $ | 0.2 | ||||||||||||||||||
| GM Cruise | 592 | 171 | (421 | ) | n.m. | $ | (0.4 | ) | |||||||||||||||||||||||
| Eliminations | (163 | ) | (4 | ) | 159 | n.m. | $ | 0.2 | $ | — | |||||||||||||||||||||
| Total automotive and other cost of sales | $ | 116,229 | $ | 121,784 | $ | 5,555 | 4.6 | % | $ | 8.6 | $ | (3.1 | ) | $ | 0.5 | $ | (0.4 | ) |
n.m. = not meaningful
The most significant element of our Automotive and other cost of sales is material cost which makes up approximately two-thirds of the total amount. The remaining portion includes labor costs, depreciation and amortization, engineering, freight and product warranty and recall campaigns.
Factors which most significantly influence a region's profitability are industry volume, market share, and the relative mix of vehicles (trucks, crossovers, cars) sold. Variable profit is a key indicator of product profitability. Variable profit is defined as revenue less material cost, freight, the variable component of manufacturing expense and warranty and recall-related costs. Vehicles with higher selling prices generally have higher variable profit. Refer to the regional sections of this MD&A for additional information on volume and mix.
In the year ended December 31, 2018 unfavorable Cost was due primarily to: (1) increased raw material and freight costs related to carryover vehicles of $1.3 billion; (2) charges of $1.3 billion primarily related to employee separation charges and accelerated depreciation resulting from the transformation activities; (3) increased other costs of $1.2 billion primarily related to manufacturing, engineering and warranty; (4) increased material and freight costs of $1.2 billion related to vehicles launched within the last twelve
GENERAL MOTORS COMPANY AND SUBSIDIARIES
months incorporating significant exterior and/or interior changes (Majors); and (5) a net increase in charges of $0.7 billion primarily related to asset impairments and employee separation charges in Korea in 2018, partially offset by restructuring actions in India and South Africa in 2017; partially offset by (6) favorable material performance of $1.1 billion related to carryover vehicles. In the year ended December 31, 2018 favorable Other was due to the foreign currency effect resulting from the weakening of the Brazilian Real and other currencies, partially offset by the strengthening of various currencies against the U.S. Dollar.
In the year ended December 31, 2017 favorable Cost was due primarily to: (1) decreased warranty costs of $1.4 billion; (2) decreased employee related costs of $0.8 billion; (3) decreased material and freight costs of $0.7 billion related to carryover vehicles; and (4) decreased restructuring costs related to UAW cash severance incentive program of $0.2 billion in 2016 that did not recur in 2017; partially offset by (5) increased material and freight costs of $1.4 billion related to Majors; (6) increased engineering costs of $0.7 billion; and (7) charges of $0.4 billion related to restructuring actions in India and South Africa. In the year ended December 31, 2017 unfavorable Other was due primarily to the foreign currency effect of $0.4 billion due to the strengthening of the Brazilian Real and other currencies against the U.S. Dollar.
Automotive and Other Selling, General and Administrative Expense
| Years Ended December 31, | Year Ended 2018 vs. 2017 Change | Year Ended 2017 vs. 2016 Change | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | Favorable/ (Unfavorable) | % | Favorable/ (Unfavorable) | % | |||||||||||||||||||
| Automotive and other selling, general and administrative expense | $ | 9,650 | $ | 9,570 | $ | 10,345 | $ | (80 | ) | (0.8 | )% | $ | 775 | 7.5 | % |
In the year ended December 31, 2018 Automotive and other selling, general and administrative expense increased due primarily to an increase in charges of $0.3 billion for ignition switch related legal matters; partially offset by decreased advertising costs of $0.3 billion.
In the year ended December 31, 2017 Automotive and other selling, general and administrative expense decreased due primarily to decreased advertising costs of $0.4 billion and a decrease in net charges of $0.2 billion for ignition switch related legal matters.
Interest Income and Other Non-operating Income, net
| Years Ended December 31, | Year Ended 2018 vs. 2017 Change | Year Ended 2017 vs. 2016 Change | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | Favorable/ (Unfavorable) | % | Favorable/ (Unfavorable) | % | |||||||||||||||||||
| Interest income and other non-operating income, net | $ | 2,596 | $ | 1,645 | $ | 1,603 | $ | 951 | 57.8 | % | $ | 42 | 2.6 | % |
In the year ended December 31, 2018 Interest income and other non-operating income, net increased due primarily to: (1) increased non-service pension and OPEB income of $0.3 billion; (2) favorable revaluation of investments of $0.3 billion; and (3) $0.2 billion from licensing agreements.
Income Tax Expense
| Years Ended December 31, | Year Ended 2018 vs. 2017 Change | Year Ended 2017 vs. 2016 Change | |||||||||||||||||||||
| 2018 | 2017 | 2016 | Favorable/ (Unfavorable) | % | Favorable/ (Unfavorable) | % | |||||||||||||||||
| Income tax expense | $ | 474 | $ | 11,533 | $ | 2,739 | $ | 11,059 | n.m. | $ | (8,794 | ) | n.m. |
n.m. = not meaningful
In the year ended December 31, 2018 Income tax expense decreased due primarily to the absence of certain expense items which occurred in 2017, including $7.3 billion of tax expense related to U.S. tax reform and $2.3 billion of tax expense related to the recording of a valuation allowance on the sale of the Opel/Vauxhall Business, combined with the impact of a lower U.S. statutory tax rate and pre-tax income in 2018.
GENERAL MOTORS COMPANY AND SUBSIDIARIES
In the year ended December 31, 2017 Income tax expense increased due primarily to the $7.3 billion tax expense related to U.S. tax reform legislation and the establishment of a $2.3 billion valuation allowance related to the sale of Opel/Vauxhall Business, partially offset by tax benefits related to tax settlements and foreign earnings.
For the year ended December 31, 2018 our ETR-adjusted was 17.4%, and we expect an effective tax rate of between 16% and 18% for the year ending December 31, 2019.
Refer to Note 17 to our consolidated financial statements for additional information related to Income tax expense.
GM North America
| Years Ended December 31, | Favorable/ (Unfavorable) | Variance Due To | |||||||||||||||||||||||||||||||||
| 2018 | 2017 | % | Volume | Mix | Price | Cost | Other | ||||||||||||||||||||||||||||
| (Dollars in billions) | |||||||||||||||||||||||||||||||||||
| Total net sales and revenue | $ | 113,792 | $ | 111,345 | $ | 2,447 | 2.2 | % | $ | 1.4 | $ | (0.7 | ) | $ | 1.4 | $ | 0.3 | ||||||||||||||||||
| EBIT-adjusted | $ | 10,769 | $ | 11,889 | $ | (1,120 | ) | (9.4 | )% | $ | 0.4 | $ | (1.5 | ) | $ | 1.4 | $ | (1.7 | ) | $ | 0.2 | ||||||||||||||
| EBIT-adjusted margin | 9.5 | % | 10.7 | % | (1.2 | )% | |||||||||||||||||||||||||||||
| (Vehicles in thousands) | |||||||||||||||||||||||||||||||||||
| Wholesale vehicle sales | 3,555 | 3,511 | 44 | 1.3 | % |
| Years Ended December 31, | Favorable/ (Unfavorable) | Variance Due To | |||||||||||||||||||||||||||||||||
| 2017 | 2016 | % | Volume | Mix | Price | Cost | Other | ||||||||||||||||||||||||||||
| (Dollars in billions) | |||||||||||||||||||||||||||||||||||
| Total net sales and revenue | $ | 111,345 | $ | 119,113 | $ | (7,768 | ) | (6.5 | )% | $ | (12.2 | ) | $ | 3.5 | $ | 0.6 | $ | 0.3 | |||||||||||||||||
| EBIT-adjusted | $ | 11,889 | $ | 12,388 | $ | (499 | ) | (4.0 | )% | $ | (3.5 | ) | $ | 0.9 | $ | 0.6 | $ | 1.8 | $ | (0.3 | ) | ||||||||||||||
| EBIT-adjusted margin | 10.7 | % | 10.4 | % | 0.3 | % | |||||||||||||||||||||||||||||
| (Vehicles in thousands) | |||||||||||||||||||||||||||||||||||
| Wholesale vehicle sales | 3,511 | 3,958 | (447 | ) | (11.3 | )% |
GMNA Total Net Sales and Revenue In the year ended December 31, 2018 Total net sales and revenue increased due primarily to: (1) favorable pricing for Majors of $1.9 billion, partially offset by unfavorable pricing for carryover vehicles of $0.5 billion, inclusive of new revenue standard impacts; (2) increased net wholesale volumes due to an increase in sales of crossover and fleet vehicles, partially offset by a decrease in sales of passenger cars, planned downtime for full-size trucks and a decrease in sales of mid-size trucks; and (3) favorable Other due to increased sales of parts and accessories; partially offset by (4) unfavorable mix due to fleet customer, trim and other mix.
In the year ended December 31, 2017 Total net sales and revenue decreased due primarily to: (1) decreased net wholesale volumes associated with a decrease in Chevrolet passenger car sales and a decrease in off-lease rental car sales; partially offset by (2) favorable mix associated with a decrease in sales of Chevrolet passenger cars and decreased volumes of off-lease rental car sales; (3) favorable pricing for Majors of $1.4 billion, partially offset by unfavorable pricing for carryover vehicles of $0.8 billion; and (4) favorable Other due primarily to the foreign currency effect resulting from the strengthening of the Canadian Dollar against the U.S. Dollar.
GMNA EBIT-Adjusted The most significant factors which influence profitability are industry volume and market share. While not as significant as industry volume and market share, another factor affecting profitability is the relative mix of vehicles sold. Trucks, crossovers and cars sold currently have a variable profit of approximately 180%, 50% and 20% of our GMNA portfolio on a weighted-average basis.
In the year ended December 31, 2018 EBIT-adjusted decreased due primarily to: (1) unfavorable Cost due to increased vehicle content for Majors of $1.3 billion and increased raw material and freight costs of $1.1 billion, partially offset by favorable materials performance of $1.0 billion related to carryover vehicles; and (2) unfavorable mix due to an increase in sales of crossover vehicles, fleet customer mix, trim and other mix, partially offset by decreased sales of passenger cars; partially offset by (3) favorable pricing; and (4) increased net wholesale volumes.
In the year ended December 31, 2017 EBIT-adjusted decreased due primarily to: (1) decreased net wholesale volumes; and (2) unfavorable Other due primarily to the foreign currency effect resulting from the weakening of the Mexican Peso against the U.S.
GENERAL MOTORS COMPANY AND SUBSIDIARIES
Dollar; partially offset by (3) favorable Cost including decreased warranty costs of $1.4 billion, decreased material and freight costs related to carryover vehicles of $0.7 billion, decreased other employee related costs of $0.7 billion, decreased advertising costs of $0.3 billion and decreased restructuring charges of $0.2 billion related to the 2016 UAW cash severance incentive program, partially offset by increased material costs for Majors of $1.3 billion and increased engineering costs of $0.3 billion; (4) favorable mix; and (5) favorable pricing.
GM International
| Years Ended December 31, | Favorable/ (Unfavorable) | Variance Due To | |||||||||||||||||||||||||||||||||
| 2018 | 2017 | % | Volume | Mix | Price | Cost | Other | ||||||||||||||||||||||||||||
| (Dollars in billions) | |||||||||||||||||||||||||||||||||||
| Total net sales and revenue | $ | 19,148 | $ | 21,920 | $ | (2,772 | ) | (12.6 | )% | $ | (1.7 | ) | $ | (0.2 | ) | $ | 0.4 | $ | (1.2 | ) | |||||||||||||||
| EBIT-adjusted | $ | 423 | $ | 1,300 | $ | (877 | ) | (67.5 | )% | $ | (0.3 | ) | $ | 0.1 | $ | 0.4 | $ | (0.1 | ) | $ | (0.9 | ) | |||||||||||||
| EBIT-adjusted margin | 2.2 | % | 5.9 | % | (3.7 | )% | |||||||||||||||||||||||||||||
| Equity income — Automotive China | $ | 1,981 | $ | 1,976 | $ | 5 | 0.3 | % | |||||||||||||||||||||||||||
| EBIT (loss)-adjusted — excluding Equity income | $ | (1,558 | ) | $ | (676 | ) | $ | (882 | ) | n.m. | |||||||||||||||||||||||||
| (Vehicles in thousands) | |||||||||||||||||||||||||||||||||||
| Wholesale vehicle sales | 1,152 | 1,267 | (115 | ) | (9.1 | )% |
n.m. = not meaningful
| Years Ended December 31, | Favorable/ (Unfavorable) | Variance Due To | |||||||||||||||||||||||||||||||||
| 2017 | 2016 | % | Volume | Mix | Price | Cost | Other | ||||||||||||||||||||||||||||
| (Dollars in billions) | |||||||||||||||||||||||||||||||||||
| Total net sales and revenue | $ | 21,920 | $ | 20,943 | $ | 977 | 4.7 | % | $ | 0.2 | $ | 0.2 | $ | 0.6 | $ | — | |||||||||||||||||||
| EBIT-adjusted | $ | 1,300 | $ | 767 | $ | 533 | 69.5 | % | $ | — | $ | (0.3 | ) | $ | 0.6 | $ | 0.3 | $ | (0.2 | ) | |||||||||||||||
| EBIT-adjusted margin | 5.9 | % | 3.7 | % | 2.2 | % | |||||||||||||||||||||||||||||
| Equity income — Automotive China | $ | 1,976 | $ | 1,973 | $ | 3 | 0.2 | % | |||||||||||||||||||||||||||
| EBIT (loss)-adjusted —excluding Equity income | $ | (676 | ) | $ | (1,206 | ) | $ | 530 | 43.9 | % | |||||||||||||||||||||||||
| (Vehicles in thousands) | |||||||||||||||||||||||||||||||||||
| Wholesale vehicle sales | 1,267 | 1,255 | 12 | 1.0 | % |
The vehicle sales of our Automotive China JVs are not recorded in Total net sales and revenue. The results of our joint ventures are recorded in Equity income, which is included in EBIT-adjusted above.
GMI Total Net Sales and Revenue In the year ended December 31, 2018 Total net sales and revenue decreased due primarily to: (1) decreased wholesale volumes in Korea due to the closure of a facility, in Argentina primarily driven by lower industry volumes, and in Asia/Pacific due to the withdrawal from the Indian and South African markets in 2017, partially offset by an increase in Brazil primarily due to an increase in sales of the Chevrolet Onix, Tracker and Equinox; (2) unfavorable Other due primarily to the foreign currency effect resulting from the weakening of the Brazilian Real and Argentine Peso against the U.S. Dollar; partially offset by (3) favorable pricing related to carryover vehicles in Argentina and Brazil.
In the year ended December 31, 2017 Total net sales and revenue increased due primarily to: (1) favorable pricing related to carryover vehicles in Argentina and Brazil and in Egypt to mitigate the impact of the weakening Egyptian Pound against the U.S. Dollar; (2) favorable mix driven by the increased sales of Chevrolet Cruze in Brazil and Argentina; and (3) increased wholesale volumes associated with the Chevrolet Onix in Brazil and Argentina, partially offset by decreased wholesale volumes across multiple product lines in Asia/Pacific, the Middle East and Africa; (4) flat Other due primarily to the foreign currency effect resulting from the strengthening of the Brazilian Real and Korean Won against the U.S. Dollar, offset by the depreciation of the Argentine Peso and Egyptian Pound against the U.S. Dollar and decreased parts and accessories sales in the Middle East.
GENERAL MOTORS COMPANY AND SUBSIDIARIES
GMI EBIT-Adjusted In the year ended December 31, 2018 EBIT-adjusted decreased due primarily to: (1) decreased wholesale volumes; and (2) unfavorable Other due primarily to the foreign currency effect resulting from the weakening of the Argentine Peso and Brazilian Real against the U.S. Dollar; partially offset by (3) favorable pricing.
In the year ended December 31, 2017 EBIT-adjusted increased due primarily to: (1) favorable pricing; and (2) favorable Cost due to decreased employee related costs and selling, general and administrative expenses across the region; partially offset by (3) unfavorable mix driven by decreased high-margin sales in the Middle East.
We view the Chinese market as important to our global growth strategy and are employing a multi-brand strategy led by our Buick, Chevrolet and Cadillac brands. In the coming years we plan to leverage our global architectures to increase the number of product offerings under the Buick, Chevrolet and Cadillac brands in China and continue to grow our business under the local Baojun and Wuling brands, with Baojun focusing its expansion in less developed cities and markets. We operate in the Chinese market through a number of joint ventures and maintaining strong relationships with our joint venture partners is an important part of our China growth strategy.
The following table summarizes certain key operational and financial data for the Automotive China JVs (vehicles in thousands):
| Years Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Wholesale vehicles including vehicles exported to markets outside of China | 4,030 | 4,140 | 4,013 | ||||||||
| Total net sales and revenue | $ | 50,316 | $ | 50,065 | $ | 47,150 | |||||
| Net income | $ | 3,992 | $ | 3,984 | $ | 4,117 |
| December 31, 2018 | December 31, 2017 | ||||||
| Cash and cash equivalents | $ | 8,609 | $ | 9,202 | |||
| Debt | $ | 496 | $ | 381 |
GM Cruise
| Years Ended December 31, | 2018 vs. 2017 Change | 2017 vs. 2016 Change | ||||||||||||||||||||||
| 2018 | 2017 | 2016 | Favorable/ (Unfavorable) | % | Favorable/ (Unfavorable) | % | ||||||||||||||||||
| EBIT (loss)-adjusted | $ | (728 | ) | $ | (613 | ) | $ | (171 | ) | $ | (115 | ) | (18.8 | )% | $ | (442 | ) | n.m. |
n.m. = not meaningful
GM Cruise EBIT (Loss)-Adjusted In the years ended December 31, 2018 and 2017 EBIT (loss)-adjusted increased due primarily to increased engineering costs as we progress towards the commercialization of autonomous vehicles.
GM Financial
| Years Ended December 31, | 2018 vs. 2017 Change | 2017 vs. 2016 Change | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | Amount | % | Amount | % | |||||||||||||||||||
| Total revenue | $ | 14,016 | $ | 12,151 | $ | 8,983 | $ | 1,865 | 15.3 | % | $ | 3,168 | 35.3 | % | |||||||||||
| Provision for loan losses | $ | 642 | $ | 757 | $ | 644 | $ | (115 | ) | (15.2 | )% | $ | 113 | 17.5 | % | ||||||||||
| Earnings before income taxes-adjusted | $ | 1,893 | $ | 1,196 | $ | 763 | $ | 697 | 58.3 | % | $ | 433 | 56.7 | % | |||||||||||
| Average debt outstanding (dollars in billions) | $ | 85.1 | $ | 74.9 | $ | 54.8 | $ | 10.2 | 13.5 | % | $ | 20.1 | 36.7 | % | |||||||||||
| Effective rate of interest paid | 3.8 | % | 3.4 | % | 3.6 | % | 0.4 | % | (0.2 | )% |
GM Financial Revenue In the year ended December 31, 2018 Total revenue increased due primarily to increased leased vehicle income of $1.4 billion due to a larger lease portfolio and increased finance charge income of $0.4 billion due to growth in the retail and commercial finance receivables portfolios.
GENERAL MOTORS COMPANY AND SUBSIDIARIES
In the year ended December 31, 2017 Total revenue increased due primarily to increased leased vehicle income of $2.7 billion due to a larger lease portfolio and increased finance charge income of $0.4 billion due to growth in the retail and commercial finance receivables portfolios.
GM Financial Earnings Before Income Taxes-Adjusted In the year ended December 31, 2018 Earnings before income taxes-adjusted increased due primarily to: (1) increased gains on sales of terminated leased vehicles of $0.5 billion due to stronger than expected used vehicle prices; (2) increased net leased vehicle income of $0.4 billion due to an increase in average balance of the lease portfolio; and (3) increased finance charge income of $0.4 billion due to an increase in the average balance of the retail and commercial finance receivables portfolios; partially offset by (4) increased interest expense of $0.7 billion due to an increase in average debt outstanding resulting from growth in the loan and lease portfolios as well as rising benchmark interest rates.
In the year ended December 31, 2017 Earnings before income taxes-adjusted increased due primarily to: (1) increased net leased vehicle income of $0.8 billion due primarily to a larger lease portfolio; and (2) increased finance charge income; partially offset by (3) increased interest expense of $0.6 billion due to an increase in average debt outstanding.
Liquidity and Capital Resources We believe that our current level of cash and cash equivalents, marketable securities and availability under our revolving credit facilities will be sufficient to meet our liquidity needs. We expect to have substantial cash requirements going forward which we plan to fund through total available liquidity and cash flows generated from operations and future debt issuances. We also maintain access to the capital markets and may issue debt or equity securities from time to time, which may provide an additional source of liquidity. Our future uses of cash, which may vary from time to time based on market conditions and other factors, are focused on three objectives: (1) reinvest in our business; (2) maintain a strong investment-grade balance sheet; and (3) return available cash to shareholders. Our known future material uses of cash include, among other possible demands: (1) capital expenditures of $8.0 billion to $9.0 billion in 2019 as well as payments for engineering and product development activities; (2) payments associated with previously announced vehicle recalls, the settlements of the multi-district litigation and any other recall-related contingencies; (3) payments to service debt and other long-term obligations, including discretionary and mandatory contributions to our pension plans; (4) dividend payments on our common stock that are declared by our Board of Directors; and (5) payments to purchase shares of our common stock authorized by our Board of Directors.
Our liquidity plans are subject to a number of risks and uncertainties, including those described in the "Forward-Looking Statements" section of this MD&A and Item 1A. Risk Factors, some of which are outside of our control.
We continue to monitor and evaluate opportunities to strengthen our competitive position over the long-term while maintaining a strong investment-grade balance sheet. These actions may include opportunistic payments to reduce our long-term obligations such as our pension plans, as well as the possibility of acquisitions, dispositions, investments with joint venture partners and strategic alliances that we believe would generate significant advantages and substantially strengthen our business. In September 2018, we used a portion of the net proceeds from the issuance of senior unsecured notes to pre-fund $0.6 billion in certain mandatory contributions to our U.K. and Canada pension plans due in 2019 through 2021.
Our senior management evaluates our capital allocation program on an ongoing basis and recommends any modifications to the program to our Board of Directors, not less than once annually. Management reaffirmed and our Board of Directors approved the capital allocation program, which includes reinvesting in our business at an average target ROIC-adjusted rate of 20% or greater, maintaining a strong investment-grade balance sheet, including an average automotive target cash balance of $18 billion, and returning available cash to shareholders.
As part of our capital allocation program, our Board of Directors authorized programs to purchase $9.0 billion in aggregate of our common stock which were completed in the three months ended September 30, 2016 and 2017. We announced in January 2017 that our Board of Directors had authorized the purchase of up to an additional $5.0 billion of our common stock with no expiration date, subsequent to completing the remaining portion of the previously announced programs. We completed $1.6 billion of the $5.0 billion program through December 31, 2018, which included $0.1 billion purchased in the three months ended March 31, 2018 in conjunction with the sale of GM common stock by the UAW Retiree Medical Benefits Trust (New VEBA). From inception of the program in 2015 through January 25, 2019 we had purchased an aggregate of 302 million shares of our outstanding common stock under our common stock repurchase program for $10.6 billion.
Automotive Liquidity Total available liquidity includes cash, cash equivalents, marketable securities and funds available under credit facilities. The amount of available liquidity is subject to intra-month and seasonal fluctuations and includes balances held by various business units and subsidiaries worldwide that are needed to fund their operations.
GENERAL MOTORS COMPANY AND SUBSIDIARIES
We manage our liquidity primarily at our treasury centers as well as at certain of our significant consolidated overseas subsidiaries. Approximately 90% of our cash and marketable securities were managed within North America and at our regional treasury centers at December 31, 2018. We have used and will continue to use other methods including intercompany loans to utilize these funds across our global operations as needed.
Our cash equivalents and marketable securities balances are primarily denominated in U.S. Dollars and include investments in U.S. government and agency obligations, foreign government securities, time deposits, corporate debt securities and mortgage and asset-backed securities. Our investment guidelines, which we may change from time to time, prescribe certain minimum credit worthiness thresholds and limit our exposures to any particular sector, asset class, issuance or security type. The majority of our current investments in debt securities are with A/A2 or better rated issuers.
We use credit facilities as a mechanism to provide additional flexibility in managing our global liquidity. At December 31, 2017 the total size of our credit facilities was $14.5 billion, which consisted principally of our two primary revolving credit facilities. In April 2018 we amended and restated our two existing revolving credit facilities and entered into a third facility, increasing our aggregate borrowing capacity from $14.5 billion to $16.5 billion. These facilities consist of a 364-day, $2.0 billion facility, a three-year, $4.0 billion facility and a five-year, $10.5 billion facility. The facilities are available to us as well as certain wholly-owned subsidiaries, including GM Financial. The three-year, $4.0 billion facility allows for borrowings in U.S. Dollars and other currencies and includes a letter of credit sub-facility of $1.1 billion. The five-year, $10.5 billion facility allows for borrowings in U.S. Dollars and other currencies. The 364-day, $2.0 billion facility allows for borrowing in U.S. Dollars only. We have allocated the 364-day, $2.0 billion facility for exclusive use by GM Financial. Total automotive available credit under the facility remained unchanged at $14.5 billion at December 31, 2018. In January 2019 we entered into a new three-year unsecured revolving credit facility with an initial borrowing capacity of $3.0 billion, reducing to $2.0 billion in July 2020. The facility will be used to fund costs related to the transformation activities announced in November 2018 and to provide additional financial flexibility.
We did not have any borrowings against our primary facilities, but had letters of credit outstanding under our sub-facility of $0.3 billion and $0.4 billion at December 31, 2018 and 2017. GM Financial did not have any borrowings against our credit facility designated for their exclusive use at December 31, 2018 or the remainder of our revolving credit facilities at December 31, 2018 and 2017. Refer to Note 13 to our consolidated financial statements for additional information on credit facilities. We had intercompany loans from GM Financial of $0.6 billion and $0.4 billion at December 31, 2018 and 2017, which consisted primarily of commercial loans to dealers we consolidate, and we had no intercompany loans to GM Financial. Refer to Note 5 of our consolidated financial statements for additional information.
In May 2018 we entered into an agreement with KDB to fund capital expenditure requirements of GM Korea. In the year ended December 31, 2018 KDB purchased $0.7 billion of GM Korea Preferred Shares. Additionally we agreed to provide future funding to GM Korea if needed, not to exceed $2.8 billion through December 31, 2027, inclusive of $2.0 billion of planned capital expenditures through 2027. Refer to Note 20 to our consolidated financial statements for further details.
In September 2018 we issued $2.1 billion in aggregate principal amount of senior unsecured notes with an initial weighted average interest rate of 5.03% and maturity dates ranging from 2021 to 2049. The notes are governed by the same indenture that was used in past issuances, which contains terms and covenants customary of these types of securities including limitations on the amount of certain secured debt we may incur. The net proceeds from the issuance of these senior unsecured notes were used to repay $1.5 billion of debt in October 2018 upon maturity, pre-fund $0.6 billion in certain mandatory contributions for our U.K. and Canada pension plans due in 2019 through 2021, and for other general corporate purposes.
GM Financial’s Board of Directors declared and paid a dividend of $0.4 billion on its common stock in October 2018. Future dividends from GM Financial will depend on a number of factors including business and economic conditions, its financial condition, earnings, liquidity requirements and leverage ratio.
GENERAL MOTORS COMPANY AND SUBSIDIARIES
The following table summarizes our available liquidity (dollars in billions):
| December 31, 2018 | December 31, 2017 | ||||||
| Automotive cash and cash equivalents | $ | 13.7 | $ | 11.2 | |||
| Marketable securities | 6.0 | 8.3 | |||||
| Automotive cash, cash equivalents and marketable securities(a)(b) | 19.6 | 19.6 | |||||
| GM Cruise cash and cash equivalents(c) | 2.3 | — | |||||
| Available liquidity | 21.9 | 19.6 | |||||
| Available under credit facilities | 14.2 | 14.1 | |||||
| Total available liquidity(a) | $ | 36.1 | $ | 33.6 |
| (a) | Amounts do not add due to rounding. |
| (b) | Includes $0.6 billion that is designated exclusively to fund capital expenditures in GM Korea at December 31, 2018. Refer to Note 20 to our consolidated financial statements for further details. |
| (c) | Amounts are designated exclusively for the use of GM Cruise and do not include $0.1 billion of GM Cruise's investment in GM stock. Refer to Note 20 to our consolidated financial statements for further details. |
The following table summarizes the changes in our Automotive available liquidity (excluding GM Cruise, dollars in billions):
| Year Ended December 31, 2018 | |||
| Operating cash flow | $ | 11.7 | |
| Capital expenditures | (8.7 | ) | |
| Dividends paid and payments to purchase common stock | (2.3 | ) | |
| Issuance of senior unsecured notes | 2.1 | ||
| Repayment of senior unsecured notes | (1.5 | ) | |
| GM investment in GM Cruise | (1.1 | ) | |
| Proceeds from KDB investment in GM Korea | 0.7 | ||
| Other non-operating | (0.7 | ) | |
| Total change in automotive available liquidity | $ | 0.2 |
Automotive Cash Flow (Dollars in Billions)
| Years Ended December 31, | 2018 vs. 2017 Change | 2017 vs. 2016 Change | |||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||
| Operating Activities | |||||||||||||||||||
| Income (loss) from continuing operations | $ | 7.1 | $ | (0.2 | ) | $ | 8.8 | $ | 7.3 | $ | (9.0 | ) | |||||||
| Depreciation, amortization and impairment charges | 6.1 | 5.7 | 5.1 | 0.4 | 0.6 | ||||||||||||||
| Pension and OPEB activities | (3.4 | ) | (2.6 | ) | (4.2 | ) | (0.8 | ) | 1.6 | ||||||||||
| Working capital | 0.7 | 1.8 | 2.2 | (1.1 | ) | (0.4 | ) | ||||||||||||
| Accrued and other liabilities and income taxes | 1.9 | 8.5 | 3.0 | (6.6 | ) | 5.5 | |||||||||||||
| Other | (0.7 | ) | 1.2 | (0.3 | ) | (1.9 | ) | 1.5 | |||||||||||
| Net automotive cash provided by operating activities | $ | 11.7 | $ | 14.4 | $ | 14.6 | $ | (2.7 | ) | $ | (0.2 | ) |
In the year ended December 31, 2018 the decrease in Net automotive cash provided by operating activities was due primarily to: (1) unfavorable pre-tax earnings from continuing operations of $3.9 billion, net of employee separation and other charges of $1.3 billion resulting from transformation activities; (2) unfavorable Pension and OPEB activities due primarily to pension contributions of $0.6 billion made to our U.K. and Canada pension plans; (3) less favorable Working capital due primarily to accounts receivable and accounts payable; and (4) unfavorable Other due to the increase in units returned from rental car companies of $0.8 billion and several other insignificant items; partially offset by (5) favorable sales incentives and other accruals of $3.6 billion; and (6) favorable re-timing of subvention payments and receivables factoring with GM Financial and other external sources of $0.4 billion.
GENERAL MOTORS COMPANY AND SUBSIDIARIES
In the year ended December 31, 2017 the decrease in Net automotive cash provided by operating activities was due primarily to: (1) unfavorable Income (loss) from continuing operations partially offset by the add back of $7.3 billion as a result of U.S. tax reform legislation and the establishment of a $2.3 billion valuation allowance related to the sale of the Opel/Vauxhall Business; and (2) unfavorable Working capital due to lower production volumes, partially offset by accelerated cash receipts from GM Financial and other external sources totaling $0.5 billion; partially offset by (3) favorable Pension and OPEB activities due primarily to discretionary contributions of $2.0 billion made to our U.S. hourly pension plan in the year ended December 31, 2016; and (4) favorable Other due to a GM Financial dividend of $0.6 billion and several insignificant items, partially offset by unfavorable equipment on operating leases of $1.1 billion due to an increase in units out to daily rental car companies.
| Years Ended December 31, | 2018 vs. 2017 Change | 2017 vs. 2016 Change | |||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||
| Investing Activities | |||||||||||||||||||
| Capital expenditures | $ | (8.7 | ) | $ | (8.3 | ) | $ | (8.3 | ) | $ | (0.4 | ) | $ | — | |||||
| Acquisitions and liquidations of marketable securities, net | 2.3 | 3.5 | (3.7 | ) | (1.2 | ) | 7.2 | ||||||||||||
| GM investment in GM Cruise | (1.1 | ) | — | — | (1.1 | ) | — | ||||||||||||
| Investment in Lyft | — | — | (0.5 | ) | — | 0.5 | |||||||||||||
| Other | (0.2 | ) | (0.4 | ) | (0.2 | ) | 0.2 | (0.2 | ) | ||||||||||
| Net automotive cash used in investing activities | $ | (7.7 | ) | $ | (5.2 | ) | $ | (12.7 | ) | $ | (2.5 | ) | $ | 7.5 |
| Years Ended December 31, | 2018 vs. 2017 Change | 2017 vs. 2016 Change | |||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||
| Financing Activities | |||||||||||||||||||
| Issuance of senior unsecured notes | $ | 2.1 | $ | 3.0 | $ | 2.0 | $ | (0.9 | ) | $ | 1.0 | ||||||||
| Net payments on short-term debt | (1.4 | ) | (0.1 | ) | — | (1.3 | ) | (0.1 | ) | ||||||||||
| Payments to purchase common stock | (0.1 | ) | (4.5 | ) | (2.5 | ) | 4.4 | (2.0 | ) | ||||||||||
| Dividends paid | (2.2 | ) | (2.2 | ) | (2.3 | ) | — | 0.1 | |||||||||||
| Proceeds from KDB investment in GM Korea | 0.7 | — | — | 0.7 | — | ||||||||||||||
| Other | (0.6 | ) | (0.4 | ) | (0.3 | ) | (0.2 | ) | (0.1 | ) | |||||||||
| Net automotive cash used in financing activities | $ | (1.5 | ) | $ | (4.2 | ) | $ | (3.1 | ) | $ | 2.7 | $ | (1.1 | ) |
Adjusted Automotive Free Cash Flow
We measure adjusted automotive free cash flow as automotive operating cash flow from continuing operations less capital expenditures adjusted for management actions. For the year ended December 31, 2018, net automotive cash provided by operating activities under U.S. GAAP was $11.7 billion, capital expenditures were $8.7 billion and an adjustment for management actions related to restructuring in Korea was $0.8 billion.
For the year ended December 31, 2017, net automotive cash provided by operating activities under U.S. GAAP was $14.4 billion, capital expenditures were $8.3 billion, and adjustments resulting from the sale of the European Business included an adjustment related to a U.K. pension plan contribution of $0.2 billion and a reduction adjustment related to a dividend received from GM Financial of $0.6 billion.
For the year ended December 31, 2016, net automotive cash provided by operating activities under U.S. GAAP was $14.6 billion, capital expenditures were $8.3 billion, and an adjustment for discretionary U.S. pension plan contributions was $2.0 billion.
Status of Credit Ratings We receive ratings from four independent credit rating agencies: DBRS Limited, Fitch Ratings (Fitch), Moody's Investor Service (Moody's) and Standard & Poor's (S&P). All four credit rating agencies currently rate our corporate credit at investment grade. The following table summarizes our credit ratings at January 25, 2019:
GENERAL MOTORS COMPANY AND SUBSIDIARIES
| Corporate | Revolving Credit Facilities | Senior Unsecured | Outlook | ||||
| DBRS Limited | BBB | BBB | N/A | Positive | |||
| Fitch | BBB | BBB | BBB | Stable | |||
| Moody's | Investment Grade | Baa2 | Baa3 | Stable | |||
| S&P | BBB | BBB | BBB | Stable |
In March 2018 DBRS Limited revised their outlook to Positive from Stable. All other credit ratings remained unchanged from January 1, 2018 through January 25, 2019.
GM Cruise Liquidity
The following table summarizes the changes in our GM Cruise available liquidity (dollars in billions):
| Year Ended December 31, 2018 | |||
| Operating cash flow | $ | (0.6 | ) |
| Issuance of GM Cruise Preferred Shares to SoftBank | 0.9 | ||
| Issuance of GM Cruise Common Shares to Honda | 0.8 | ||
| GM investment in GM Cruise | 1.1 | ||
| Other non-operating | 0.2 | ||
| Total change in GM Cruise available liquidity | $ | 2.4 |
When GM Cruise's autonomous vehicles are ready for commercial deployment, SoftBank is obligated to purchase additional GM Cruise Preferred Shares for $1.35 billion, subject to regulatory approval. In addition, Honda agreed to contribute approximately $2.0 billion primarily in the form of a long-term annual fee to GM Cruise Holdings for certain rights to use GM Cruise Holdings' trade names and trademarks and the exclusive right to partner with GM Cruise Holdings to develop, deploy, and maintain a foreign market.
GM Cruise Cash Flow (Dollars in Billions)
| Years Ended December 31, | 2018 vs. 2017 Change | 2017 vs. 2016 Change | |||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||
| Net cash used in operating activities | $ | (0.6 | ) | $ | (0.5 | ) | $ | (0.1 | ) | $ | (0.1 | ) | $ | (0.4 | ) | ||||
| Net cash used in investing activities | $ | (0.1 | ) | $ | (0.1 | ) | $ | (0.3 | ) | $ | — | $ | 0.2 | ||||||
| Net cash provided by financing activities | $ | 3.0 | $ | 0.6 | $ | 0.4 | $ | 2.4 | $ | 0.2 |
In the year ended December 31, 2017 Net cash used in operating activities increased due primarily to unfavorable income from operations.
In the year ended December 31, 2018 Net cash provided by financing activities increased due primarily to the GM investment in GM Cruise, proceeds from the issuance of GM Cruise Preferred Shares to SoftBank, and proceeds from the issuance of GM Cruise Common Shares to Honda.
GENERAL MOTORS COMPANY AND SUBSIDIARIES
Automotive Financing – GM Financial Liquidity GM Financial's primary sources of cash are finance charge income, leasing income and proceeds from the sale of terminated leased vehicles, net distributions from credit facilities, including securitizations, secured and unsecured borrowings and collections and recoveries on finance receivables. GM Financial's primary uses of cash are purchases of retail finance receivables and leased vehicles, the funding of commercial finance receivables, repayment of secured and unsecured debt, funding credit enhancement requirements in connection with securitizations and secured debt facilities, operating expenses, and interest costs. In September 2018 GM Financial issued $0.5 billion of Fixed-to-Floating Rate Cumulative Perpetual Preferred Stock, Series B, $0.01 par value, with a liquidation preference of $1,000 per share. In September 2017 GM Financial issued $1.0 billion of Fixed-to-Floating Rate Cumulative Perpetual Preferred Stock, Series A, $0.01 par value, with a liquidation preference of $1,000 per share. Refer to Note 20 to our consolidated financial statements for further details. The following table summarizes GM Financial's available liquidity (dollars in billions):
| December 31, 2018 | December 31, 2017 | ||||||
| Cash and cash equivalents | $ | 4.9 | $ | 4.3 | |||
| Borrowing capacity on unpledged eligible assets | 18.0 | 12.5 | |||||
| Borrowing capacity on committed unsecured lines of credit | 0.3 | 0.1 | |||||
| Borrowing capacity on revolving credit facility, exclusive to GM Financial | 2.0 | — | |||||
| Total GM Financial available liquidity | $ | 25.2 | $ | 16.9 |
In the year ended December 31, 2018 available liquidity increased due primarily to an increase in cash and additional capacity on new and renewed secured revolving credit facilities, resulting from the issuance of securitizations and unsecured debt. In addition, GM Financial added $2.0 billion in borrowing capacity on our 364-day credit facility as described in the Automotive Liquidity section of this MD&A.
GM Financial has access to our revolving credit facilities of $16.5 billion with exclusive access to the 364-day, $2.0 billion facility. Refer to the Automotive Liquidity section of this MD&A for additional details. We have a support agreement with GM Financial which, among other things, establishes commitments of funding from us to GM Financial. This agreement also provides that we will continue to own all of GM Financial’s outstanding voting shares so long as any unsecured debt securities remain outstanding at GM Financial. In addition we are required to use our commercially reasonable efforts to ensure GM Financial remains a subsidiary borrower under our corporate revolving credit facilities.
Credit Facilities In the normal course of business, in addition to using its available cash, GM Financial utilizes borrowings under its credit facilities, which may be secured or unsecured, and GM Financial repays these borrowings as appropriate under its cash management strategy. At December 31, 2018 secured, committed unsecured and uncommitted unsecured credit facilities totaled $26.4 billion, $0.4 billion and $2.0 billion with advances outstanding of $3.4 billion, an insignificant amount and $2.0 billion.
GM Financial Cash Flow (Dollars in Billions)
| Years Ended December 31, | 2018 vs. 2017 Change | 2017 vs. 2016 Change | |||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||
| Net cash provided by operating activities | $ | 7.4 | $ | 6.5 | $ | 4.7 | $ | 0.9 | $ | 1.8 | |||||||||
| Net cash used in investing activities | $ | (17.5 | ) | $ | (21.9 | ) | $ | (23.7 | ) | $ | 4.4 | $ | 1.8 | ||||||
| Net cash provided by financing activities | $ | 11.1 | $ | 16.1 | $ | 19.1 | $ | (5.0 | ) | $ | (3.0 | ) |
In the years ended December 31, 2018 and 2017 Net cash provided by operating activities increased due primarily to an increase in leased vehicle income and finance charge income, partially offset by increased interest expense.
In the year ended December 31, 2018 Net cash used in investing activities decreased due primarily to: (1) increased collections on finance receivables of $4.5 billion; (2) increased proceeds from the termination of leased vehicles of $4.2 billion; and (3) decreased purchases of leased vehicles of $2.4 billion; partially offset by (4) increased purchases and funding of finance receivables of $6.8 billion.
In the year ended December 31, 2017 Net cash used in investing activities decreased due primarily to: (1) increased proceeds from the termination of leased vehicles of $4.1 billion; (2) increased collections and recoveries on retail finance receivables of
GENERAL MOTORS COMPANY AND SUBSIDIARIES
$3.0 billion; and (3) decreased purchases of leased vehicles of $0.3 billion; partially offset by (4) increased net purchases of retail finance receivables of $5.5 billion.
In the year ended December 31, 2018 Net cash provided by financing activities decreased due primarily to a decrease in borrowing, net of payments, of $4.6 billion and a decrease in the issuance of preferred stock of $0.5 billion.
In the year ended December 31, 2017 Net cash provided by financing activities decreased due primarily to an increase in repayments of $12.4 billion and a special dividend payment to GM of $0.6 billion, partially offset by an increase in borrowings of $9.0 billion and the issuance of preferred stock of $1.0 billion.
Off-Balance Sheet Arrangements We do not currently utilize off-balance sheet securitization arrangements. All trade or finance receivables and related obligations subject to securitization programs are recorded on our consolidated balance sheets at December 31, 2018 and 2017. Refer to Note 16 of our consolidated financial statements for detailed information related to guarantees we have provided and for our noncancelable operating lease obligations.
Contractual Obligations and Other Long-Term Liabilities We have minimum commitments under contractual obligations, including purchase obligations. A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including fixed or minimum quantities to be purchased or fixed minimum price provisions and the approximate timing of the transaction. Based on these definitions, the following table includes only those contracts which include fixed or minimum obligations. The majority of our purchases are not included in the table as they are made under purchase orders which are requirements based and accordingly do not specify minimum quantities. The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities at December 31, 2018:
| Payments Due by Period | |||||||||||||||||||
| 2019 | 2020-2021 | 2022-2023 | 2024 and after | Total | |||||||||||||||
| Automotive debt | $ | 812 | $ | 1,002 | $ | 1,552 | $ | 10,568 | $ | 13,934 | |||||||||
| Automotive Financing debt | 31,045 | 38,191 | 12,513 | 9,937 | 91,686 | ||||||||||||||
| Capital lease obligations | 137 | 92 | 41 | 258 | 528 | ||||||||||||||
| Automotive interest payments(a) | 743 | 1,430 | 1,365 | 9,725 | 13,263 | ||||||||||||||
| Automotive Financing interest payments(b) | 2,811 | 2,994 | 1,198 | 714 | 7,717 | ||||||||||||||
| Postretirement benefits(c) | 250 | 25 | — | — | 275 | ||||||||||||||
| Operating lease obligations, net | 235 | 438 | 255 | 453 | 1,381 | ||||||||||||||
| Other contractual commitments: | |||||||||||||||||||
| Material | 1,235 | 669 | 174 | 118 | 2,196 | ||||||||||||||
| Marketing | 819 | 282 | 18 | 25 | 1,144 | ||||||||||||||
| Rental car repurchases | 405 | — | — | — | 405 | ||||||||||||||
| Other | 1,010 | 429 | 106 | 218 | 1,763 | ||||||||||||||
| Total contractual commitments(d) | $ | 39,502 | $ | 45,552 | $ | 17,222 | $ | 32,016 | $ | 134,292 | |||||||||
| Non-contractual benefits(e) | $ | 317 | $ | 983 | $ | 944 | $ | 10,229 | $ | 12,473 |
| (a) | Amounts include automotive interest payments based on contractual terms and current interest rates on our debt and capital lease obligations. Automotive interest payments based on variable interest rates were determined using the interest rate in effect at December 31, 2018. |
| (b) | GM Financial interest payments were determined using the interest rate in effect at December 31, 2018 for floating rate debt and the contractual rates for fixed rate debt. GM Financial interest payments on floating rate tranches of the securitization notes payable were converted to a fixed rate based on the floating rate plus any expected hedge payments. |
| (c) | Amounts include OPEB payments under the current U.S. contractual labor agreements through 2019 and Canada labor agreements through 2021. These agreements are generally renegotiated in the year of expiration. Amounts do not include pension funding obligations, which are discussed in Note 15 to our consolidated financial statements. |
| (d) | Amounts do not include future cash payments for long-term purchase obligations and other accrued expenditures (unless specifically listed in the table above) which were recorded in Accounts payable or Accrued liabilities at December 31, 2018. |
| (e) | Amounts include all expected future payments for both current and expected future service at December 31, 2018 for OPEB obligations for salaried and hourly employees extending beyond the current North American union contract agreements, workers' compensation and extended disability benefits. Amounts do not include pension funding obligations, which are discussed in Note 15 to our consolidated financial statements. |
GENERAL MOTORS COMPANY AND SUBSIDIARIES
The table above does not reflect product warranty and related liabilities, certified pre-owned, extended warranty and free maintenance of $8.5 billion and unrecognized tax benefits of $1.3 billion due to the uncertainty regarding the future cash outflows potentially associated with these amounts. In addition, future cash outflows related to transformation activities announced in November 2018 are not included in the table above. Refer to Note 18 of our consolidated financial statements for additional information. To fund costs associated with transformation activities, we entered into a new three-year committed unsecured revolving credit facility in January 2019, with an initial borrowing capacity of $3.0 billion reducing to $2.0 billion in July 2020.
Critical Accounting Estimates The consolidated financial statements are prepared in conformity with U.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses in the periods presented. We believe the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent uncertainties in developing estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. Refer to Note 2 to our consolidated financial statements for our significant accounting policies related to our critical accounting estimates.
Product Warranty and Recall Campaigns The estimates related to product warranties are established using historical information on the nature, frequency and average cost of claims of each vehicle line or each model year of the vehicle line and assumptions about future activity and events. When little or no claims experience exists for a model year or a vehicle line, the estimate is based on comparable models.
We accrue the costs related to product warranty at the time of vehicle sale and we accrue the estimated cost of recall campaigns when they are probable and estimable, which is generally at the time of sale.
The estimates related to recall campaigns accrued at the time of vehicle sale are established by applying a frequency times severity approach that considers the number of recall campaigns, the number of vehicles per recall campaign, the assumed number of vehicles that will be brought in by customers for repair (take rate) and the cost per vehicle for each recall campaign. These estimates consider the nature, frequency and magnitude of historical recall campaigns. Costs associated with recall campaigns not accrued at the time of vehicle sale are estimated based on the estimated cost of repairs and the estimated vehicles to be repaired. Depending on part availability and time to complete repairs we may, from time to time, offer courtesy transportation at no cost to our customers. These estimates are re-evaluated on an ongoing basis and based on the best available information. Revisions are made when necessary based on changes in these factors.
The estimated amount accrued for recall campaigns at the time of vehicle sale is most sensitive to the estimated number of recall events, the number of vehicles per recall event, the take rate, and the cost per vehicle for each recall event. The estimated cost of a recall campaign that is accrued on an individual basis is most sensitive to our estimated assumed take rate that is primarily developed based on our historical take rate experience. A 10% increase in the estimated take rate for all recall campaigns would increase the estimated cost by approximately $0.2 billion.
Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods. Due to the uncertainty and potential volatility of the factors contributing to developing estimates, changes in our assumptions could materially affect our results of operations.
Sales Incentives The estimated effect of sales incentives offered to dealers and end customers is recorded as a reduction of Automotive net sales and revenue at the time of sale. There may be numerous types of incentives available at any particular time. Incentive programs are generally specific to brand, model or sales region and are for specified time periods, which may be extended. Significant factors used in estimating the cost of incentives include forecasted sales volume, product mix, and the rate of customer acceptance of incentive programs, all of which are estimated based on historical experience and assumptions concerning future customer behavior and market conditions. A change in any of these factors affecting the estimate could have a significant effect on recorded sales incentives. Subsequent adjustments to incentive estimates are possible as facts and circumstances change over time, which could affect the revenue previously recognized in Automotive net sales and revenue.
Valuation of GM Financial Equipment on Operating Leases Assets and Residuals GM Financial has investments in leased vehicles recorded as operating leases, which relate to vehicle leases to retail customers with lease terms which typically range from two to five years. At the beginning of the lease an estimate is made of the expected residual value at the end of the lease term. The expected residual value is based on third-party data which considers inputs including recent auction values, the expected future volume of returning leased vehicles, used vehicle prices, manufacturer incentive programs and fuel prices. Realization of the
GENERAL MOTORS COMPANY AND SUBSIDIARIES
residual values is dependent on the future ability to market the vehicles under prevailing market conditions. The customer is obligated to make payments during the term of the lease for the difference between the purchase price and the contract residual value plus a money factor. Since the customer is not obligated to purchase the vehicle prior to or at the end of the contract, we are exposed to a risk of loss to the extent the customer returns the vehicle at the end of the lease term and the value of the vehicle is below the expected residual value estimated at the inception of the lease.
The following table summarizes vehicles included in GM Financial equipment on operating leases, net (vehicles in thousands):
| December 31, 2018 | December 31, 2017 | ||||
| Cars | 379 | 450 | |||
| Trucks | 296 | 285 | |||
| Crossovers | 917 | 818 | |||
| SUVs | 111 | 99 | |||
| Total | 1,703 | 1,652 |
At December 31, 2018 the estimated residual value of our leased assets at the end of the lease term was $31.4 billion. We periodically review the adequacy of the depreciation rates. If we believe that the expected residual values of the leased assets have changed, we revise the depreciation rate to ensure the net investment in the operating leases reflects the revised estimate of expected residual value at the end of the lease term. Such adjustments to the depreciation rate would result in a change in depreciation expense on leased assets which is recorded prospectively on a straight-line basis. The following table illustrates the effect of a 1% change in the estimated residual values at December 31, 2018, which would increase or decrease depreciation expense over the remaining term of our operating lease portfolio, holding all other assumptions constant:
| Impact to Depreciation Expense | |||
| Cars | $ | 49 | |
| Trucks | 73 | ||
| Crossovers | 150 | ||
| SUVs | 42 | ||
| Total | $ | 314 |
We also evaluate the carrying value of the operating leases aggregated by vehicle make, year and model into leased asset groups, check for indicators of impairment and test for impairment to the extent necessary in accordance with applicable accounting standards. A leased asset group is considered impaired if impairment indicators exist and the undiscounted expected future cash flows (including the expected residual value) are lower than the carrying value of the asset group. We believe no impairment indicators existed during 2018, 2017 or 2016.
Pension and OPEB Plans Our defined benefit pension plans are accounted for on an actuarial basis, which requires the selection of various assumptions, including an expected long-term rate of return on plan assets, a discount rate, mortality rates of participants and expectation of mortality improvement. Our pension obligations include Korean statutory pension payments that are valued on a walk away basis. The expected long-term rate of return on U.S. plan assets that is utilized in determining pension expense is derived from periodic studies, which include a review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks using standard deviations and correlations of returns among the asset classes that comprise the plans' asset mix. While the studies give appropriate consideration to recent plan performance and historical returns, the assumptions are primarily long-term, prospective rates of return.
In December 2018 an investment policy study was completed for the U.S. pension plans. As a result of changes to our capital market assumptions the weighted-average long-term rate of return on assets decreased from 6.6% at December 31, 2017 to 6.4% at December 31, 2018. The expected long-term rate of return on plan assets used in determining pension expense for non-U.S. plans is determined in a similar manner to the U.S. plans.
Another key assumption in determining net pension and OPEB expense is the assumed discount rate used to discount plan obligations. We estimate the assumed discount rate for U.S. plans using a cash flow matching approach, which uses projected cash flows matched to spot rates along a high quality corporate bond yield curve to determine the weighted-average discount rate for the calculation of the present value of cash flows. We apply the individual annual yield curve rates instead of the assumed discount
GENERAL MOTORS COMPANY AND SUBSIDIARIES
rate to determine the service cost and interest cost, which more specifically links the cash flows related to service cost and interest cost to bonds maturing in their year of payment.
The Society of Actuaries (SOA) issued mortality improvement tables in the three months ended December 31, 2018. We reviewed our recent mortality experience and have updated our base mortality assumptions in the U.S. This change in assumption decreased the December 31, 2018 U.S. pension and OPEB plans' obligations by $0.3 billion. We determined our current mortality assumptions are appropriate to measure our December 31, 2018 U.S. pension and OPEB plans obligations.
Significant differences in actual experience or significant changes in assumptions may materially affect the pension obligations. The effects of actual results differing from assumptions and the changing of assumptions are included in unamortized net actuarial gains and losses that are subject to amortization to pension expense over future periods. The unamortized pre-tax actuarial loss on our pension plans was $4.7 billion and $4.0 billion at December 31, 2018 and 2017. The year-over-year change is primarily due to lower than expected asset returns partially offset by the increase in discount rates. At December 31, 2018 $2.1 billion of the unamortized pre-tax actuarial loss is outside the corridor (primarily 10% of the projected benefit obligation (PBO)) and subject to amortization. The weighted-average amortization period is approximately sixteen years resulting in amortization expense of $0.1 billion in 2019.
The underfunded status of the U.S. pension plans decreased by $0.7 billion in the year ended December 31, 2018 to $5.1 billion due primarily to: (1) a favorable effect of an increase in discount rates of $4.1 billion; and (2) other favorable changes including contributions, demographic gains and assumption changes of $0.3 billion; partially offset by (3) service and interest cost of $2.3 billion; and (4) an unfavorable effect of actual returns on plan assets of $1.4 billion.
The following table illustrates the sensitivity to a change in certain assumptions for the pension plans, holding all other assumptions constant:
| U.S. Plans(a) | Non-U.S. Plans(a) | ||||||
| Effect on 2019 Pension Expense | Effect on December 31, 2018 PBO | Effect on 2019 Pension Expense | Effect on December 31, 2018 PBO | ||||
| 25 basis point decrease in discount rate | -$80 | +$1,480 | +$19 | +$589 | |||
| 25 basis point increase in discount rate | +$80 | -$1,420 | +$11 | -$564 | |||
| 25 basis point decrease in expected rate of return on assets | +$140 | N/A | +$33 | N/A | |||
| 25 basis point increase in expected rate of return on assets | -$140 | N/A | -$33 | N/A |
| (a) | The sensitivity does not include the effects of the individual annual yield curve rates applied for the calculation of the service and interest cost. |
Refer to Note 15 to our consolidated financial statements for additional information on pension contributions, investment strategies, assumptions, the change in benefit obligations and related plan assets, pension funding requirements and future net benefit payments. Refer to Note 2 to our consolidated financial statements for a discussion of the inputs used to determine fair value for each significant asset class or category.
Valuation of Deferred Tax Assets The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The assessment regarding whether a valuation allowance is required or should be adjusted is based on an evaluation of possible sources of taxable income and also considers all available positive and negative evidence factors. Our accounting for the valuation of deferred tax assets represents our best estimate of future events. Changes in our current estimates, due to unanticipated market conditions, governmental legislative actions or events, could have a material effect on our ability to utilize deferred tax assets. Refer to Note 17 to our consolidated financial statements for additional information on the composition of these valuation allowances.
Forward-Looking Statements In this 2018 Form 10-K and in reports we subsequently file and have previously filed with the SEC on Forms 10-K and 10-Q and file or furnish on Form 8-K, and in related comments by our management, we use words like “aim,” “anticipate,” “appears,” “approximately,” “believe,” “continue,” “could,” “designed,” “effect,” “estimate,” “evaluate,” “expect,” “forecast,” “goal,” “initiative,” “intend,” “may,” “objective,” “outlook,” “plan,” “potential,” “priorities,” “project,” “pursue,” “seek,” “should,” “target,” “when,” “will,” “would,” or the negative of any of those words or similar expressions to identify forward-looking statements that represent our current judgment about possible future events. In making these statements we rely on assumptions and analysis based on our experience and perception of historical trends, current conditions and expected
GENERAL MOTORS COMPANY AND SUBSIDIARIES
future developments as well as other factors we consider appropriate under the circumstances. We believe these judgments are reasonable, but these statements are not guarantees of any events or financial results, and our actual results may differ materially due to a variety of important factors, both positive and negative. These factors, which may be revised or supplemented in subsequent reports on SEC Forms 10-Q and 8-K, include among others the following: (1) our ability to deliver new products, services and customer experiences in response to increased competition in the automotive industry; (2) our ability to timely fund and introduce new and improved vehicle models that are able to attract a sufficient number of consumers; (3) the success of our crossovers, SUVs and full-size pick-up trucks; (4) our ability to successfully and cost-effectively restructure our operations in the U.S. and various other countries and initiate additional cost reduction actions with minimal disruption; (5) our ability to reduce the costs associated with the manufacture and sale of electric vehicles and drive increased consumer adoption; (6) unique technological, operational and regulatory risks related to our autonomous vehicle regulations; (7) global automobile market sales volume, which can be volatile; (8) our significant business in China which is subject to unique operational, competitive and regulatory risks as well as economic conditions in China; (9) our joint ventures, which we cannot operate solely for our benefit and over which we may have limited control; (10) the international scale and footprint of our operations which exposes us to a variety of political, economic and regulatory risks, including the risk of changes in government leadership and laws (including labor, tax and other laws), political instability and economic tensions between governments and changes in international trade policies, new barriers to entry and changes to or withdrawals from free trade agreements, changes in foreign exchange rates and interest rates, economic downturns in foreign countries, differing local product preferences and product requirements, compliance with U.S. and foreign countries' export controls and economic sanctions, differing labor regulations, requirements and union relationships, differing dealer and franchise regulations and relationships, and difficulties in obtaining financing in foreign countries; (11) any significant disruption at one of our manufacturing facilities could disrupt our production schedule; (12) the ability of our suppliers to deliver parts, systems and components without disruption and at such times to allow us to meet production schedules; (13) prices of raw materials used by us and our suppliers; (14) our highly competitive industry, which is characterized by excess manufacturing capacity and the use of incentives and the introduction of new and improved vehicle models by our competitors; (15) the possibility that competitors may independently develop products and services similar to ours or that our intellectual property rights are not sufficient to prevent competitors from developing or selling those products or services; (16) our ability to manage risks related to security breaches and other disruptions to our vehicles, information technology networks and systems; (17) our ability to comply with increasingly complex, restrictive, and punitive regulations relating to our enterprise data practices, including the collection, use, sharing, and security of the Personal Identifiable Information of our customers, employees, or suppliers; (18) our ability to comply with extensive laws and regulations applicable to our industry, including those regarding fuel economy and emissions and autonomous vehicles; (19) costs and risks associated with litigation and government investigations; (20) the cost and effect on our reputation of product safety recalls and alleged defects in products and services; (21) any additional tax expense or exposure; (22) our continued ability to develop captive financing capability through GM Financial; and (23) significant increases in our pension expense or projected pension contributions resulting from changes in the value of plan assets or the discount rate applied to value the pension liabilities or mortality or other assumption changes. A further list and description of these risks, uncertainties and other factors can be found in this 2018 Form 10-K and our subsequent filings with the SEC.
We caution readers not to place undue reliance on forward-looking statements. We undertake no obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, future events or other factors that affect the subject of these statements, except where we are expressly required to do so by law.
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