General Motors Co annual report, FY2018

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General Motors Company — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; it includes unaudited quarterly results. Figures below are in U.S. dollars unless stated otherwise. The European businesses sold in 2017 are presented as discontinued operations.

Business context and financial performance

  • GM designs, manufactures and sells vehicles and parts globally, and provides automotive financing through GM Financial. Reportable segments are GM North America (GMNA), GM International (GMI), GM Cruise and GM Financial.
  • Revenue: $147.0 billion, up 1.0% from $145.6 billion in 2017. Automotive revenue was $133.0 billion; GM Financial revenue was $14.0 billion.
  • Profit: Operating income was $4.4 billion, down from $8.7 billion. Income from continuing operations was $8.1 billion, compared with $0.3 billion in 2017; net income attributable to stockholders was $8.0 billion, versus a $3.9 billion loss. 2017 results included substantial tax charges and the European-business sale. Diluted EPS was $5.53; diluted EPS from continuing operations was $5.58.
  • Adjusted operating measures: EBIT-adjusted was $11.8 billion, versus $12.8 billion in 2017; Core EBIT-adjusted was $12.5 billion, versus $13.5 billion. EBIT-adjusted margin was approximately 8.0% of revenue. GMNA EBIT-adjusted fell 9.4% to $10.8 billion, with a 9.5% margin; GMI fell 67.5% to $0.4 billion, with a 2.2% margin. GM Financial adjusted pretax earnings rose 58.3% to $1.9 billion.
  • Cash flow and investment: Continuing-operations operating cash flow was $15.3 billion, versus $17.3 billion. Automotive operating cash flow was $11.7 billion, down from $14.4 billion; automotive capital expenditures were $8.7 billion. These figures imply adjusted automotive free cash flow of approximately $3.8 billion after adding back the disclosed $0.8 billion Korea restructuring cash outflow. Total capital expenditures were $8.8 billion.
  • Liquidity: Automotive available liquidity, including GM Cruise cash and undrawn facilities, was $36.1 billion at year-end, versus $33.6 billion. GM Financial separately reported $25.2 billion of available liquidity. Consolidated cash and cash equivalents were $20.8 billion, and marketable securities were $6.0 billion.
  • Debt and equity: Automotive debt was $14.0 billion and GM Financial debt was $91.0 billion. Total equity was $42.8 billion, up from $36.2 billion. GM declared dividends of $1.52 per common share for the year. All four disclosed rating agencies rated GM investment grade.
  • Other key metrics: Wholesale vehicle sales were 4.707 million, down from 4.778 million. U.S. market share was 16.7%, down 0.4 percentage points; China share was 13.8%, down 0.5 points. China joint ventures generated $2.0 billion of equity income.

Material changes versus 2017

  • Revenue increased modestly, but operating income and adjusted EBIT declined. GMNA faced higher material, freight and vehicle-launch costs; GMI was affected by lower volumes and currency weakness.
  • The reported net-income swing largely reflects 2017’s $7.3 billion U.S. tax-reform charge and $2.3 billion deferred-tax valuation allowance related to the European-business sale, rather than a comparable improvement in underlying operating profit.
  • GM Financial revenue increased 15.3% and adjusted pretax earnings increased 58.3%, supported by portfolio growth and stronger gains on terminated leased vehicles, partly offset by higher interest expense.
  • Automotive cash flow declined by $2.7 billion. GM cited lower pre-tax earnings, pension funding, less favorable working capital and increased rental-vehicle returns, partly offset by higher sales-incentive accruals.
  • GM adopted new revenue-recognition accounting in 2018. The company estimated this increased 2018 revenue by $944 million and net income attributable to stockholders by $108 million; prior-period figures were not restated.

Outlook, management commentary and risks

  • For 2019, GM forecast diluted EPS of $5.17–$6.00 and adjusted diluted EPS of $6.50–$7.00. It expected an adjusted effective tax rate of 16%–18% and $8.0–$9.0 billion in capital expenditures.
  • Management targeted approximately $6.0 billion of annual cash savings from transformation activities by the end of 2020, including approximately $4.5 billion from staffing, manufacturing and product initiatives. GM expected $1.5–$2.0 billion of additional North American transformation charges in 2019 and approximately $1.5 billion of related cash outflows by the end of 2020.
  • GM expected to sustain a strong GMNA adjusted margin in 2019, assuming continued strength in U.S. light-vehicle sales and favorable mix, partly offset by commodities, tariffs and pricing pressure. It expected China industry sales to remain relatively flat, with pricing and regulatory challenges, and China JV equity income to be moderately lower.
  • GM identified risks from cyclical vehicle demand, dependence on higher-margin trucks and SUVs, competition, China market conditions, foreign exchange and trade policy, commodity costs, supplier disruptions, labor negotiations, emissions and fuel-economy rules, and execution of restructuring, electric-vehicle and autonomous-vehicle strategies. The UAW agreement was due to expire in September 2019.
  • Material contingencies include ongoing ignition-switch and other recall litigation, possible Takata-related U.S. repairs estimated at approximately $1.2 billion if required, and potential GM Korea wage-related losses disclosed at approximately $590 million, $170 million and $150 million for separate claims. GM also disclosed possible issuance of up to 30 million shares if allowed claims against the GUC Trust exceed the contractual threshold; the trust reported approximately $31.9 billion of allowed claims at year-end.
  • GM’s U.S. pension plans remained underfunded by $5.1 billion. Management cited sensitivity to asset returns, interest rates and actuarial assumptions. GM also warned of used-vehicle residual-value exposure; it expected used-vehicle prices to decline 4%–5% in 2019.

Most important facts for investors to verify

  • Whether 2019 EPS guidance and the forecast transformation savings are achieved, and how much of the restructuring costs are cash versus non-cash.
  • Whether GMNA margins withstand commodity, tariff and pricing pressures, and whether China JV income remains resilient as market conditions weaken.
  • Whether operating cash flow, automotive liquidity and debt remain adequate after planned investment, shareholder returns, pension contributions and restructuring outlays.
  • Developments in ignition-switch, Takata, GM Korea wage and other legal matters, including any change in estimated exposure or required cash payments.
  • GM Financial credit performance and lease residual values, particularly against the forecast decline in used-vehicle prices and continued portfolio growth.