Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report for Period Ended June 30, 2007 HTML 1.21M
2: EX-10.1 Uaw-Delphi-Gm Memorandum of Understanding 46 127K
3: EX-10.2 Asset Purchase Agreement 86 395K
4: EX-10.3 2007 Cash-Based Restricted Stock Unit Plan 6 36K
5: EX-10.4 Form of Special Rsu Grant Award Document for March 2 11K
2007 Award
6: EX-10.5 Form of Special Cash-Based Rsu Grant Award 2 11K
Document for March 2007 Award
7: EX-10.6 364-Day Revolving Credit Agreement 58 237K
8: EX-31.1 Section 302 Certification of the Chief Executive HTML 13K
Officer
9: EX-31.2 Section 302 Certification of the Chief Financial HTML 13K
Officer
10: EX-32.1 Certification of the Chief Executive Officer HTML 9K
Pursuant to Section 906
11: EX-32.2 Certification of the Chief Financial Officer HTML 9K
Pursuant to Section 906
Registrant’s telephone number, including area code
NA
(former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of July 31, 2007, the number of shares outstanding of
the Registrant’s common stock was 565,870,304 shares.
General Motors Corporation’s internet website address is
www.gm.com. Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
section 13(a) or 15(d) of the Exchange Act are available
free of charge through our website as soon as reasonably
practicable after they are electronically filed with, or
furnished to, the Securities and Exchange Commission.
Short-term borrowings and current
portion of long-term debt
5,150
5,666
1,340
Liabilities related to assets held
for sale
526
—
—
Accrued expenses
35,487
35,225
48,516
Total current liabilities
71,905
67,822
77,786
Financing and Insurance
Operations Liabilities
Liabilities related to assets held
for sale
—
—
267,925
Debt
7,133
9,438
12,849
Other liabilities and deferred
income taxes
855
2,139
2,278
Total Financing and Insurance
Operations Liabilities
7,988
11,577
283,052
Non-Current
Liabilities
Long-term debt
34,134
33,067
32,946
Postretirement benefits other than
pensions
48,030
50,086
30,668
Pensions
11,654
11,934
11,498
Other liabilities and deferred
income taxes
15,106
15,957
20,014
Total non-current liabilities
108,924
111,044
95,126
Total liabilities
188,817
190,443
455,964
Minority interests
1,268
1,190
1,084
Stockholders’ Equity
(Deficit)
Preferred stock, no par value,
authorized 6,000,000, no shares issued and outstanding
—
—
—
Common stock,
$12/3
par value (2,000,000,000 shares authorized, 756,637,541 and
565,864,695 shares issued and outstanding at June 30,2007, respectively 756,637,541 and 565,670,254 shares
issued and outstanding at December 31, 2006, respectively
and 756,637,541 and 565,607,779 shares issued and
outstanding at June 30, 2006, respectively)
943
943
943
Capital surplus (principally
additional paid-in capital)
15,255
15,336
15,306
Retained earnings (deficit)
788
406
(117
)
Accumulated other comprehensive loss
(20,544
)
(22,126
)
(4,189
)
Total stockholders’ equity
(deficit)
(3,558
)
(5,441
)
11,943
Total Liabilities, Minority
Interests, and Stockholders’ Equity (Deficit)
$
186,527
$
186,192
$
468,991
Reference should be made to the notes to the condensed
consolidated financial statements.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Nature of
Operations
General Motors Corporation (GM) is primarily engaged in the
worldwide production and marketing of cars and trucks. GM
develops, manufactures, and markets vehicles worldwide through
its four automotive regions: GM North America (GMNA), GM Europe
(GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia
Pacific (GMAP). Also, GM’s finance and insurance operations
are primarily conducted through GMAC LLC, the successor to
General Motors Acceptance Corporation (together with GMAC LLC,
GMAC), a wholly-owned subsidiary through November 2006. On
November 30, 2006, GM sold a 51% controlling ownership
interest in GMAC to a consortium of investors. After the sale,
GM has accounted for its 49% ownership interest in GMAC using
the equity method. GMAC provides a broad range of financial
services, including consumer vehicle financing, automotive
dealership and other commercial financing, residential mortgage
services, automobile service contracts, personal automobile
insurance coverage and selected commercial insurance coverage.
GM operates in two businesses, consisting of Automotive (GM
Automotive or GMA) and Financing and Insurance Operations (FIO).
Note 2.
Basis of
Presentation
The accompanying unaudited Condensed Consolidated Financial
Statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) for
interim financial information. Accordingly, they do not include
all of the information and footnotes required by United States
generally accepted accounting principles (GAAP) for complete
financial statements. In the opinion of management, these
Condensed Consolidated Financial Statements include all
adjustments, consisting of only normal recurring items,
considered necessary for a fair presentation of the financial
position and results of operations of GM. The operating results
for interim periods are not necessarily indicative of results
that may be expected for any other interim period or for the
full year. These unaudited Condensed Consolidated Financial
Statements should be read in conjunction with the consolidated
financial statements and notes thereto included in GM’s
Annual Report on
Form 10-K
for the year ended December 31, 2006 as filed with the SEC.
The Condensed Consolidated Financial Statements include the
accounts of GM and its subsidiaries that are controlled by GM
due to ownership of a majority voting interest. In addition, GM
consolidates variable interest entities (VIEs) for which it is
the primary beneficiary. GM’s share of earnings or losses
of investees are included in the consolidated operating results
using the equity method of accounting, when GM is able to
exercise significant influence over the operating and financial
decisions of the investee. If GM is not able to exercise
significant influence over the operating and financial decisions
of the investee, the cost method of accounting is used. All
intercompany balances and transactions have been eliminated in
consolidation.
Change
in Presentation of Financial Statements
In 2007, GM changed its income statement presentation to present
costs and expenses of its FIO operations as a separate line. In
so doing, GM reclassified FIO’s portion of Selling,
general, and administrative expense and Interest expense to
Financial services and insurance expense. Also, Automotive and
other interest expense has been presented within non-operating
income and expenses. Additionally, prior period results have
been reclassified for the retroactive effect of discontinued
operations. Refer to Note 3. Certain reclassifications have
been made to the comparable 2006 restated financial information
to conform to the current period presentation.
Employer’s
Accounting for Defined Benefit Pension and Other Postretirement
Plans
As previously reported in our 2006 Annual Report on
Form 10-K,
GM recognized the funded status of its benefit plans at
December 31, 2006 in accordance with the recognition
provisions of Statement of Financial Accounting Standards
No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans”
(SFAS No. 158). Additionally, GM elected to early
adopt the measurement date provisions of SFAS No. 158
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 2.
Basis of
Presentation — (continued)
at January 1, 2007. Those provisions require the
measurement date for plan assets and liabilities to coincide
with the sponsor’s year end. Refer to Note 13.
Accounting
for Uncertainty in Income Taxes
During the first quarter of 2007, GM adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”
(FIN 48), which supplements SFAS No. 109,
“Accounting for Income Taxes”, by defining the
confidence level that a tax position must meet in order to be
recognized in the financial statements. FIN 48 requires
that the tax effects of a position be recognized only if it is
“more-likely-than-not” to be sustained based solely on
its technical merits as of the reporting date. The
more-likely-than-not threshold represents a positive assertion
by management that a company is entitled to the economic
benefits of a tax position. If a tax position is not considered
more-likely-than-not to be sustained based solely on its
technical merits, no benefits of the tax position are to be
recognized. Moreover, the more-likely-than-not threshold must
continue to be met in each reporting period to support continued
recognition of a benefit. With the adoption of FIN 48,
companies are required to adjust their financial statements to
reflect only those tax positions that are more-likely-than-not
to be sustained. Any necessary adjustment would be recorded
directly to retained earnings and reported as a change in
accounting principle. GM adopted FIN 48 as of
January 1, 2007, and recorded an increase to retained
earnings of $137.1 million as a cumulative effect of a
change in accounting principle with a corresponding decrease to
the liability for uncertain tax positions. Refer to Note 10
for more information regarding the impact of adopting
FIN 48.
Accounting
for Early Retirement or Postemployment Programs with Specific
Features
On January 1, 2006, GM adopted Emerging Issues Task Force
Issue
No. 05-5,
“Accounting for Early Retirement or Postemployment Programs
with Specific Features”
(EITF 05-5),
which states that the bonus and contributions made into the
German government pension program should be accounted for under
the guidance in SFAS No. 112, “Employers’
Accounting for Postemployment Benefit Costs” and the
government subsidy should be recognized when a company meets the
necessary conditions to be entitled to the subsidy. As clarified
in
EITF 05-5,
beginning in 2006, GM recognized the bonus and additional
contributions (collectively, additional compensation) into the
German government pension plan over the period from which the
employee signed the program contract until the end of the active
service period. Prior to 2006, GM recognized the full additional
compensation one-year before the employee entered the active
service period. The change, reported as a change in accounting
estimate effected by a change in accounting principle, resulted
in additional compensation expense of $68 million for the
six months ended June 30, 2006.
Accounting
for Servicing of Financial Assets
On January 1, 2006, GM adopted SFAS No. 156,
“Accounting for Servicing of Financial Assets”
(SFAS No. 156), which (1) provides revised
guidance on when a servicing asset and servicing liability
should be recognized, (2) requires all separately
recognized servicing assets and liabilities to be initially
measured at fair value, if practicable, (3) permits an
entity to elect to measure servicing assets and liabilities at
fair value each reporting date and report changes in fair value
in earnings in the period in which the changes occur,
(4) provides that upon initial adoption, a one-time
reclassification of available-for-sale securities to trading
securities for securities which are identified as offsetting an
entity’s exposure to changes in the fair value of servicing
assets or liabilities that a servicer elects to subsequently
measure at fair value, and (5) requires separate
presentation of servicing assets and liabilities subsequently
measured at fair value in the balance sheet and additional
disclosures. GM recorded a reduction to retained earnings as of
January 1, 2006 of $13 million as a cumulative effect
of a change in accounting principle for the adoption of
SFAS No. 156.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 2.
Basis of
Presentation — (concluded)
Accounting
Standards Not Yet Adopted
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurement” (SFAS No. 157),
which provides a definition of fair value, establishes a
framework for measuring fair value and requires expanded
disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The provisions of
SFAS No. 157 are to be applied prospectively.
Management is currently assessing the potential impact of the
standard on GM’s financial condition and results of
operations.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities — Including an Amendment of
SFAS No. 115” (SFAS No. 159), which
permits an entity to measure certain financial assets and
financial liabilities at fair value that are not currently
required to be measured at fair value. Entities that elect the
fair value option will report unrealized gains and losses in
earnings at each subsequent reporting date. The fair value
option may be elected on an
instrument-by-instrument
basis, with a few exceptions. SFAS No. 159 amends
previous guidance to extend the use of the fair value option to
available-for-sale and held-to-maturity securities. The
statement also establishes presentation and disclosure
requirements to help financial statement users understand the
effect of the election. SFAS No. 159 is effective as
of the beginning of the first fiscal year beginning after
November 15, 2007. Management is currently assessing the
potential impact of the standard on GM’s financial
condition and results of operations.
In June 2007, the FASB ratified the consensus in EITF Issue
No. 07-3
“Accounting for Nonrefundable Payments for Goods or
Services to Be Used in Future Research and Development
Activities”, requiring that nonrefundable advance payments
for future research and development activities be deferred and
capitalized. Such amounts should be expensed as the related
goods are delivered or the related services are performed. The
statement is effective for fiscal years beginning after
December 15, 2007. Management is currently assessing the
potential impact of the standard on GM’s financial
condition and results of operations.
In June 2007, the FASB ratified EITF Issue
No. 06-11
“Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards”
(EITF 06-11),
which requires entities to record tax benefits on dividends or
dividend equivalents that are charged to retained earnings for
certain share-based awards to additional paid-in capital. In a
share-based payment arrangement, employees may receive dividends
or dividend equivalents on awards of nonvested equity shares,
nonvested equity share units during the vesting period, and
share options until the exercise date. Generally, the payment of
such dividends can be treated as deductible compensation for tax
purposes. The amount of tax benefits recognized in additional
paid-in capital should be included in the pool of excess tax
benefits available to absorb tax deficiencies on share-based
payment awards.
EITF 06-11
is effective for fiscal years beginning after December 15,2007, and interim periods within those years. Management does
not expect this guidance to have a material effect on GM’s
financial condition and results of operations.
Note 3.
Divestures
of Businesses
Sale
of Allison Transmission Business
On June 28, 2007, GM entered into a definitive agreement
pursuant to which GM will sell the commercial and military
operations of our Allison Transmission (Allison) business for a
purchase price of approximately $5.6 billion in cash plus
assumed liabilities. The purchase price is subject to adjustment
based on the amount of Allison’s (1) net working
capital and (2) debt on the closing date. Based on these
amounts, a payment may be due from either party within
approximately thirty-five days after the closing date. Any such
payment will be an adjustment to the amount of gain recognized
on the transaction. Allison, a division of GM’s Powertrain
Operations, is a global leader in the design and manufacture of
commercial and military automatic transmissions and a premier
global provider of commercial vehicle automatic transmissions
for on-highway, including trucks, specialty vehicles, buses and
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 3.
Divestures
of Businesses — (continued)
recreational vehicles, off-highway and military vehicles, as
well as hybrid propulsion systems for transit buses. GM
Powertrain Operations Baltimore facility, which manufactures
automatic transmissions primarily for GM trucks and hybrid
propulsion system, will be retained by GM. GM expects to
recognize a gain on the sale of Allison in the range of
$5.1 billion to $5.4 billion. GM expects to close the
sale of Allison in the third quarter of 2007, subject to
regulatory approval.
At June 30, 2007, Allison met the held for sale criteria
under SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (SFAS
No. 144), and therefore, certain assets and liabilities of
Allison are presented as held for sale, and GM has ceased
depreciation on Allison’s long-lived assets classified as
held for sale. The results of operations and cash flows of
Allison have been reported in the Condensed Consolidated
Financial Statements as discontinued operations for all periods
presented.
Historically, Allison had been reported in the Automotive
business. The following table presents Allison’s major
classes of assets and liabilities classified as held for sale as
of June 30, 2007 (dollars in millions):
Accounts and notes receivable, net
$
103
Inventories
124
Other assets
84
Property, plant and equipment, net
372
Total assets held for sale
$
683
Accounts payable
$
198
Accrued expenses and other
liabilities
248
Deferred revenue
45
Postretirement benefits
35
Total liabilities related to
assets held for sale
$
526
The table above represents the respective assets and liabilities
that are held for sale as of June 30, 2007, which excludes
certain assets and liabilities, consisting of cash, limited
accounts receivable, inventory, tooling, taxes payable, deferred
income taxes and a synthetic lease obligation of the facility
that is being retained. The held for sale asset and liability
balances at June 30, 2007 may differ from the
respective balances at closing.
The following table summarizes the results of discontinued
operations (dollars in millions):
As part of the transaction, GM and the buyers of Allison are
negotiating for GM to provide the new parent company of Allison
with contingent financing of up to $100 million. Such
financing would be made available if, during a defined period of
time, Allison were not in compliance with its financial
maintenance covenant under the credit agreement and the buyer
were to elect to make an equity contribution into Allison to
bring it into compliance. Such financing would be contingent on
Allison’s buyers committing to provide an equivalent amount
of funding to Allison through its parent company on the same
terms as the GM loan under such circumstances. Additionally,
both
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 3.
Divestures
of Businesses — (continued)
parties have entered into non-compete arrangements for a term of
10 years in the U.S. and for a term of 5 years in
Europe.
Sale
of 51% Controlling Interest in GMAC
In April 2006, GM and its wholly owned subsidiaries, GMAC and GM
Finance Co. Holdings Inc., entered into a definitive agreement
pursuant to which GM agreed to sell a 51% controlling interest
in GMAC for a purchase price of $7.4 billion to FIM
Holdings LLC (FIM Holdings). FIM Holdings is a consortium of
investors, including Cerberus FIM Investors, LLC, Citigroup
Inc., Aozora Bank Limited, and a subsidiary of the PNC Financial
Services Group, Inc. The sale was completed on November 30,2006. GM has retained a 49% interest in GMAC’s Common
Membership Interests. The total value of the cash proceeds and
distributions to GM after repayment of certain intercompany
obligations, and before it purchased the preferred membership
interests of GMAC was expected to be approximately
$14 billion over three years, comprised of the
$7.4 billion purchase price and $2.7 billion cash
dividend at closing, and other transaction related cash flows
including the monetization of certain retained assets. In March
2007, GM made a capital contribution to GMAC of approximately
$1 billion to restore its adjusted tangible equity balance
to the contractually required amount of $14.4 billion, due
to the decrease in the adjusted tangible equity balance of GMAC
as of November 30, 2006.
For the three and six months ended June 30, 2006,
GMAC’s earnings and cash flows are fully consolidated in
GM’s Condensed Consolidated Statements of Operations and
Statements of Cash Flows. However, as a result of the agreement
to sell 51% equity interest, certain assets and liabilities of
GMAC were classified as held for sale in GM’s Condensed
Consolidated Balance Sheet as of June 30, 2006. Pursuant to
SFAS No. 144, GM ceased depreciation on GMAC
long-lived assets classified as held for sale in GM’s
consolidated financial statements. The following table presents
GMAC’s major classes of assets and liabilities classified
as held for sale as of June 30, 2006 (dollars in millions):
Cash and cash equivalents
$
14,458
Marketable securities
18,808
Finance receivables, net
174,074
Loans held for sale
20,455
Account and notes receivable
7,733
Inventories, net
558
Net equipment on operating leases,
net
18,805
Other assets
20,584
Allowance to reflect assets held
for sale at fair value less cost to sell
(1,208
)
Total assets held for sale
$
274,267
Accounts payable
$
3,805
Notes and loans payable
234,474
Deferred income taxes
1,392
Accrued expenses and other
liabilities
28,254
Total liabilities related to
assets held for sale
$
267,925
The table above represents 100% of the respective assets and
liabilities of GMAC that were held for sale as of June 30,2006. The transaction resulted in the divesture of a 51%
interest in GMAC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 3.
Divestures
of Businesses — (concluded)
GM recognized a non-cash impairment charge of approximately
$2.9 billion in 2006, of which $1.2 billion is
recorded in Other expenses in the Condensed Consolidated
Statements of Operations for the three and six months ended
June 30, 2006 to reflect GMAC’s assets that were
classified as held for sale at the lower of carrying value or
fair value less costs to sell. The total charge is comprised of
the write-down of the carrying value of GMAC assets that were
sold on November 30, 2006 partially offset by the
realization of 51% of the unrecognized net gains reflected in
GMAC’s Accumulated other comprehensive income.
Refer to Notes 1, 5, and 17 for additional information
regarding the sale of, investment in, and transactions with,
GMAC.
Sale
of GMAC Commercial Mortgage
In March 2006, GM, through GMAC, sold approximately 79% of our
equity in GMAC Commercial Mortgage for approximately
$1.5 billion in cash. At the closing, GMAC Commercial
Mortgage also repaid to us approximately $7.3 billion of
intercompany loans, for total cash proceeds of
$8.8 billion. Subsequent to the sale, the remaining
interest in GMAC Commercial Mortgage was reflected using the
equity method.
Productive material, work in
process, and supplies
$
5,707
$
5,810
$
6,341
Finished product, including
service parts, etc.
10,820
9,619
9,678
Total inventories at FIFO
16,527
15,429
16,019
Less LIFO allowance
(1,454
)
(1,508
)
(1,523
)
Total
15,073
13,921
14,496
FIO off-lease vehicles
240
185
—
Total inventories
$
15,313
$
14,106
$
14,496
Note 5.
Investment
in Nonconsolidated Affiliates
Nonconsolidated affiliates of GM identified herein are those
entities in which GM owns an equity interest and for which GM
uses the equity method of accounting, because GM has the ability
to exert significant influence over decisions relating to their
operating and financial affairs. GM’s significant
affiliates and the percent of GM’s current equity ownership
or voting interest in them are as follows:
China — Shanghai General Motors Co., Ltd (50% at
June 30, 2007 and 2006) and SAIC-GM-Wuling Automobile
Co., Ltd (34% at June 30, 2007 and 2006)
GMAC was a wholly-owned subsidiary of GM during the three and
six months ended June 30, 2006. In November 2006, GM sold a
51% controlling ownership interest in GMAC. The remaining 49%
interest held by GM, in the form of GMAC Common Membership
Interests, is accounted for using the equity method. In
addition, GM acquired 1,555,000 Preferred Membership Interests
representing approximately 74% of the Preferred Membership
Interests for a cash price of $1.4 billion. The investment
in GMAC Preferred Membership Interests, a cost method
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 5.
Investment
in Nonconsolidated
Affiliates — (continued)
investment, was initially recorded at fair value of
$1.6 billion at the date of its acquisition. The excess of
fair value over the cash exchanged for the Preferred Membership
Interests reduced GM’s investment in GMAC Common Membership
Interests. At June 30, 2007, GM’s investment in GMAC
Preferred Membership Interests was $1.6 billion. GMAC is
required to make certain quarterly distributions to holders of
the Preferred Membership Interests in cash on a pro rata basis.
The Preferred Membership Interests are issued in units of $1,000
and accrue a yield at a rate of 10% per annum. GM accrued a
dividend of $38 million and $77 million for the three
and six months ended June 30, 2007, respectively. Refer to
Note 17 for a description of the related party transactions
with GMAC.
Information regarding GM’s share of net income (loss) for
the nonconsolidated affiliates is included in the table below:
In March 2006, GM sold 92.4 million shares of its
investment in Suzuki Motor Corporation (Suzuki), reducing
GM’s equity stake in Suzuki from 20.4% to 3.7% or
16.3 million shares. The sale of GM’s interest
generated cash proceeds of $2 billion and resulted in a
gain on the sale of $666 million, which was recorded in
Automotive interest income and other non-operating income in the
Condensed Consolidated Statement of Operations. Effective with
completion of the sale, GM’s remaining investment in Suzuki
is accounted for as an available-for-sale equity security.
In the second quarter of 2006, GMAC recognized a gain of
$415 million on the sale of its equity interest in a
regional home builder, which was recorded in the Automotive
interest and other non-operating income in the Condensed
Consolidated Statement of Operations. Under the equity method of
accounting, GMAC’s share of income recorded from this
investment was $22.5 million and $42.4 million for the
three and six months ended June 30, 2006, respectively.
Note 6.
Product
Warranty Liability
Policy, product warranty, recall campaigns and certified used
vehicle warranty liabilities include the following:
Increase in liability (warranties
issued during period)
2,592
4,517
2,223
Payments
(2,240
)
(4,463
)
(2,193
)
Adjustments to liability
(pre-existing warranties)
(95
)
(570
)
(420
)
Effect of foreign currency
translation
142
445
113
Reclassification of Allison
liabilities to Liabilities related to assets held for sale
(103
)
—
—
Ending balance
$
9,360
$
9,064
$
8,858
Management reviews and adjusts these estimates on a regular
basis based on the differences between actual experience and
historical estimates or other available information.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 7.
GMNA
Postemployment Benefit Costs
Costs to idle, consolidate or close facilities and provide
postemployment benefits to employees idled on an other than
temporary basis are accrued based on management’s best
estimate of the wage and benefits costs that will be incurred
for qualified employees under the Job Opportunity Bank-Security
program (JOBS Bank) provisions of the current labor agreement
through the date of its expiration in September 2007, plus
estimated costs expected to be paid thereafter taking into
account policy changes that GM intends to negotiate into the
JOBS program after the expiration of the current collective
bargaining agreement. Costs related to the idling of employees
that are expected to be temporary are expensed as incurred. GM
reviews the adequacy and continuing need for these liabilities
on a quarterly basis in conjunction with its quarterly
production and labor forecasts.
In March 2006, GM, Delphi Corporation (Delphi) and the
International Union, United Auto, Aerospace and Agricultural
Implement Workers of America (UAW) reached an agreement (the UAW
Attrition Agreement) intended to reduce the number of
U.S. hourly employees through an accelerated attrition
program (the Attrition Program). Under the Attrition Program, GM
provided certain UAW-represented employees at GM with (1) a
lump sum payment of $35,000 for normal or early voluntary
retirements retroactive to October 1, 2005; (2) a
mutually satisfactory retirement for employees with at least
10 years of credited service and 50 years of age or
older; (3) payment of gross monthly wages ranging from
$2,750 to $2,900 to those employees who participate in a special
voluntary pre-retirement program depending on years of credited
service and plant work location; and (4) a buy-out of
$140,000 for employees with 10 or more years of seniority, or
$70,000 for employees with less than 10 years seniority,
provided such employees severed all ties with GM except for any
vested pension benefits. Approximately 34,400 GM hourly
employees agreed to the terms of the Attrition Program. GM
recorded a charge of $2.1 billion in 2006 to recognize the
wage and benefit cost of those accepting normal and voluntary
retirements, buy-outs or pre-retirement leaves. As a result of
the Attrition Program, the JOBS Bank was substantially reduced
as employees from the JOBS Bank retired, took a buy-out or
filled openings created by the Attrition Program. Certain
employees who chose to leave GM retired or left by
January 1, 2007 but will continue to receive payments until
2010.
Throughout 2006, GM recorded favorable adjustments totaling
$1 billion to the postemployment benefits reserve primarily
as a result of (1) the transfer of employees from idled
plants to other plant sites to replace those positions
previously held by employees who accepted retirements, buy-outs,
or pre-retirement leaves, (2) a higher than anticipated
level of Attrition Program participation by employees at idled
facilities and facilities to be idled that were previously
accrued for under the JOBS Bank provisions, and (3) higher
than anticipated headcount reductions associated with the GMNA
plant idling activities announced in 2005. In 2005, GM
recognized a charge of $1.8 billion for postemployment
benefits related to the restructuring of its North American
operations. Approximately 17,500 employees were included in
the 2005 charge for locations included in this action, some
leaving GM through attrition and the remainder transferring to
other sites.
The liability for postemployment benefit costs of
$865 million at June 30, 2007 reflects estimated
future wages and benefits for 8,000 employees, primarily
located at idled facilities and facilities to be idled and
4,400 employees subject to the terms of the Attrition
Program. At December 31, 2006, the postemployment benefit
costs liability reflects estimated future wages and benefits of
$1.3 billion related to 8,500 employees, primarily
located at idled facilities and facilities to be idled as a
result of previous GMNA plant idling activities and
10,900 employees subject to the terms of the Attrition
Program. The liability for postemployment benefit costs as of
June 30, 2006 reflects estimated future wages and benefits
of $2.8 billion related to 12,300 employees, primarily
at idled facilities and facilities to be idled as a result of
previous announcements and 32,500 employees under the terms
of the Attrition Program.
On June 22, 2007, GM entered into a short-term revolving
credit agreement with a syndicate of third-party lenders, that
provides for borrowings of up to $4.1 billion. Borrowings
under the facility bear a variable interest rate at the prime
rate or LIBOR, at the borrower’s option. The credit
facility is collateralized by GM’s common equity interest
in GMAC. The total commitment available under the agreement will
be reduced or eliminated if GM’s interest held in the
common equity of GMAC is either disposed of or diluted beyond
specified thresholds as a result of a common stock issuance by
GMAC. Commitment fees accrue and are paid on the used and unused
portions of the facility. The borrowings are to be used for
general corporate purposes, which may include funding portions
of GM’s turnaround plan and addressing the potential risks
and contingencies described below and in GM’s 2006 Annual
Report on
Form 10-K
in “Risk Factors — Risks related to GM and its
Automotive business”. No borrowings were outstanding under
this agreement at June 30, 2007.
In May, 2007, GM entered into a revolving credit agreement
expiring in June, 2008, with a lender that provides for
borrowings of up to $.5 billion. Borrowings under the
facility bear interest based on LIBOR. Commitment fees accrue
and are paid on the unused portion of the facility. The
borrowings are to be used for general corporate purposes
including working capital needs. No borrowings were outstanding
under this agreement at June 30, 2007.
Contingent
Convertible Debt
In May, 2007, GM issued $1.5 billion of 1.5% Series D
convertible debentures due in 2009, with interest payable
semiannually. The debentures are senior unsecured obligations
ranking equally with all other unsecured and unsubordinated
debt. The Series D debentures may be converted at the
option of the holder into common stock based on an initial
conversion rate of .6837 shares per $25.00 principal amount
of debentures, which represents an initial conversion price of
approximately $36.57 per share. The conversion features of the
Series D debentures become convertible upon the occurrence
of one of the following events:
•
closing price of common stock exceeds 120% of the conversion
price for at least 20 trading days in the 30 consecutive trading
days ending on the last trading day of the preceding calendar
quarter; or
•
during the five business day period after any nine consecutive
trading day period in which the trading price of the debentures
for each day of such period was less than 95% of the product of
the closing sale price of common stock on such day, and the
applicable conversion rate; or
•
upon the occurrence of specified corporate events, as defined,
including but not limited to, merger, consolidation, binding
share exchange or transfer or lease of all or substantially all
of our assets, pursuant to which GM’s common stock would be
converted into cash, securities, or other assets, or
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 8.
Short-Term
Borrowings and Long-Term
Debt — (concluded)
•
at any time from March 1, 2009 to the second business day
immediately preceding the maturity date. The Series D
debentures mature June 1, 2009.
GM has committed to use cash, to settle the principal amount of
the debentures if (1) holders choose to convert the
debentures or (2) GM is required by the holders to
repurchase the debentures. Upon conversion, GM retains the right
to use cash, stock or a combination thereof, to settle any
amount that may become due to debt holders in excess of the
principal amount. The conversion price of $36.57 is subject to
adjustment including but not limited to the occurrence of stock
dividends, the issuance of rights and warrants, and the
distribution of assets or debt securities to all holders of
shares of common stock. In addition, in the event of a
make-whole fundamental change, as defined in the underlying
prospectus supplement, the conversion rate will be increased
based on (1) the date on which such make-whole fundamental
change becomes effective and (2) GM’s common stock
price paid in the
make-whole
fundamental change or average common stock price. In any event,
the conversion rate shall not exceed .8205 per $25.00 principal
amount of Series D debentures, subject to adjustment for
events previously mentioned. If a fundamental change occurs
prior to maturity, the debenture holders may require GM to
repurchase all or a portion of the debentures for cash at a
price equal to the principal amount plus accrued and unpaid
interest, if any, to, but not including, the date of repurchase.
GM may not elect to redeem the Series D debentures prior to
the maturity date.
In connection with the issuance of the Series D debentures,
GM purchased a hedging instrument for the Series D
debentures in a private transaction. The hedge instrument is
expected to reduce the potential dilution with respect to
GM’s common stock upon conversion of the Series D
debentures to the extent that the market value per share of
GM’s common stock does not exceed a specified cap,
resulting in an effective conversion price of $45.71 per share.
This transaction will terminate at the earlier of the maturity
date of the Series D debentures or when the Series D
debentures are no longer outstanding due to conversion or
otherwise.
GM received net proceeds from the issuance of the Series D
debentures, net of issue costs and the purchase of the
convertible note hedge, of $1.4 billion. Debt issue costs
of $32 million were incurred and are being amortized using
the effective interest method over the term of the Series D
debentures. In accordance with EITF Issue
No. 00-19,
“Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own
Stock,” GM recorded the cost of the convertible note hedge,
which aggregated $99 million, as a reduction of additional
paid-in capital. Any subsequent changes in fair value of the
convertible note hedge are not recognized. The net proceeds will
be used for general corporate purposes, which may include
funding portions of GM’s turnaround plan and addressing the
potential risks and contingencies described below and in
GM’s 2006 Annual Report on
Form 10-K
in “Risk Factors — Risks related to GM and its
Automotive business.”
Note 9.
Commitments
and Contingent Matters
Commitments
GM has provided guarantees in relation to the residual value of
certain operating leases, primarily related to the lease of
GM’s corporate headquarters. At June 30, 2007, the
maximum potential amount of future undiscounted payments that
could be required to be made under these guarantees amount to
$636 million. These guarantees terminate in periods ranging
from 2008 to 2018. Certain leases contain renewal options.
GM has agreements with third parties that guarantee the
fulfillment of certain suppliers’ commitments. At
June 30, 2007, the maximum potential future undiscounted
payments that could be required to be made under these
guarantees amounted to $80 million. Years of expiration
pertaining to these guarantees range from 2007 to 2035. Other
guarantees with a maximum potential amount of future
undiscounted payments that could be required
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 9.
Commitments
and Contingent Matters — (continued)
amounted to $4 million at June 30, 2007 with the
period of expiration determined by business conditions, i.e.,
emergence from bankruptcy or the sale of the business.
In addition, in some instances, certain assets of the party
whose debt or performance is guaranteed may offset, to some
degree, the effect of the triggering of the guarantee. The
offset of certain payables of GM may also apply to certain
guarantees. No liabilities were recorded with respect to such
guarantees as the amounts were determined to be insignificant.
GM also provides payment guarantees on commercial loans made by
GMAC and outstanding with certain third-parties. As of
June 30, 2007 maximum commercial obligations guaranteed by
GM were approximately $132 million. Years of expiration
pertaining to these guarantees range from 2007 to 2012. Based on
the creditworthiness of these third parties, the value ascribed
to the guarantees provided by GM was determined to be
insignificant.
In addition, GM has entered into agreements with GMAC and FIM
Holdings LLC, related to the disposal of its 51% interest in
GMAC, that incorporate indemnification provisions. The maximum
potential future undiscounted payments to which GM may be
exposed in terms of these indemnification provisions amount to
$2.5 billion. No amounts have been recorded for such
indemnities as the fair value of these indemnifications is
immaterial.
GM has entered into agreements indemnifying certain parties with
respect to environmental conditions pertaining to existing or
sold GM properties. Due to the nature of the indemnifications,
GM’s maximum exposure under these guarantees cannot be
estimated. No amounts have been recorded for such indemnities,
as GM’s obligations are not probable or estimable at this
time.
In addition to the guarantees and indemnifying agreements
mentioned above, GM periodically enters into agreements that
incorporate indemnification provisions in the normal course of
business. Due to the nature of these agreements, the maximum
potential amount of future undiscounted payments to which GM may
be exposed cannot be estimated. No amounts have been recorded
for such indemnities as GM’s obligations under them are not
probable and estimable at this time.
Environmental
GM’s operations, like operations of other companies engaged
in similar businesses, are subject to a wide range of
environmental protection laws, including laws regulating air
emissions, water discharges, waste management, and environmental
cleanup. GM is in various stages of investigation or remediation
for sites where contamination has been alleged. We are involved
in a number of remediation actions to clean up hazardous wastes
as required by federal and state laws. Such statutes require
that responsible parties fund remediation actions regardless of
fault, legality of original disposal or ownership of a disposal
site.
The future impact of environmental matters, including potential
liabilities, is often difficult to estimate. We record an
environmental reserve when it is probable that a liability has
been incurred and the amount of the liability is reasonably
estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts
reserved will be paid out over the periods of remediation for
the applicable sites, which typically range from five to
30 years.
For many sites, the remediation costs and other damages for
which we ultimately may be responsible are not reasonably
estimable because of uncertainties with respect to factors such
as our connection to the site or to materials there, the
involvement of other potentially responsible parties, the
application of laws and other standards or regulations, site
conditions, and the nature and scope of investigations, studies,
and remediation to be undertaken (including the technologies to
be required and the extent, duration, and success of
remediation). As a result, we are
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 9.
Commitments
and Contingent Matters — (continued)
unable to determine or reasonably estimate the amount of costs
or other damages for which we are potentially responsible in
connection with these sites, although that total could be
substantial.
While the final outcome of environmental matters cannot be
predicted with certainty, it is the opinion of GM that none of
these items, when finally resolved, will have a material adverse
effect on the Company’s financial position or liquidity.
However, should a number of these items occur in the same
period, it could have a material adverse effect on the results
of operations in a particular quarter or fiscal year.
Asbestos
Claims
Like most automobile manufacturers, GM has been subject in
recent years to asbestos-related claims. GM has seen these
claims primarily arise from three circumstances. A majority of
these claims seek damages for illnesses alleged to have resulted
from asbestos used in brake components. A limited numbers of
claims have arisen from asbestos contained in the insulation and
brakes used in the manufacturing of locomotives, and claims
brought by contractors who allege exposure to
asbestos-containing products while working on premises owned by
GM.
While GM has resolved many of the asbestos-related cases over
the years and continues to do so for strategic litigation
reasons such as avoiding defense costs and possible exposure to
excessive verdicts, management believes that only a small
proportion of the claimants has or will ever develop any
asbestos-related impairment. Only a small percentage of the
claims pending against GM allege causation of a malignant
disease associated with asbestos exposure. The amount expended
on asbestos-related matters in any year depends on the number of
claims filed, the amount of pretrial proceedings, and the number
of trials and settlements during the period.
GM records an estimated liability associated with reported
asbestos claims when it believes that the expected loss is both
probable and can be reasonably estimated. Prior to 2006, with
respect to incurred but not yet reported claims, GM concluded
that a range of probable losses was not reasonably estimable.
Over the last several years, GM has continued to accumulate data
associated with asbestos claims. Based on review of this data
during the fourth quarter of 2006, management determined that it
had enough information to determine a reasonable estimate of its
projected incurred, but not yet reported, claims that could be
asserted over the next two years. Based on its analysis, GM
recorded a $127 million charge for unasserted asbestos
claims during the three months ended December 31, 2006. GM
believes its liability for asbestos claims is adequate.
The amounts recorded by GM for the asbestos-related claims were
based upon currently known information. Future events, such as
the number of new claims to be filed each year and the average
cost of disposing of claims, as well as the numerous
uncertainties surrounding asbestos litigation in the United
States, could cause the actual costs to be significantly
different from those projected. Due to the uncertainty inherent
in factors used to determine GM’s asbestos-related
liabilities, it is reasonably possible that future costs to
resolve asbestos claims may be greater than the estimate;
however, GM does not believe that it can reasonably estimate how
much greater it could be.
While the final outcome of asbestos-related matters cannot be
predicted with certainty, after discussion with counsel and
considering, among other things liabilities that have been
recorded, it is the opinion of management that none of these
items, when finally resolved, is expected to have a material
adverse effect on GM’s financial position or liquidity.
However, should many of these items occur in the same period,
they could have a material adverse effect on the results of
operations in a particular quarter or fiscal year.
Contingent
Matters
During the second quarter of 2007, GM do Brasil recorded a
$43 million charge for potential taxes and related matters
concerning improperly registered material included in
consignment contracts. This amount represents the low end of the
range of potential additional taxes and fines that may be
assessed. The range of possible fines based
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 9.
Commitments
and Contingent Matters — (continued)
on information available is from $43 million to
$450 million. GM do Brasil is providing documentation to
the tax authorities that may reduce the fines that will
eventually be paid.
Litigation is subject to uncertainties and the outcome of
individual litigated matters is not predictable with assurance.
Various legal actions, governmental investigations, claims, and
proceedings are pending against GM, including a number of
shareholder class actions, bondholder class actions, shareholder
derivative suits and ERISA class actions and other matters
arising out of alleged product defects, including
asbestos-related claims; employment-related matters;
governmental regulations relating to safety, emissions, and fuel
economy; product warranties; financial services; dealer,
supplier, and other contractual relationships; and environmental
matters.
GM has established reserves for matters in which it believes
that losses are probable and can be reasonably estimated. Some
of the matters may involve compensatory, punitive, or other
treble damage claims, or demands for recall campaigns, incurred
but not reported asbestos-related claims, environmental
remediation programs, or sanctions, that if granted, could
require the Corporation to pay damages or make other
expenditures in amounts that could not be reasonably estimated
at June 30, 2007. While the final outcome of these matters
cannot be predicted with certainty, after discussion with
counsel, it is the opinion of management that such claims are
not expected to have a material adverse effect on GM’s
consolidated financial condition or results of operations.
However, should many of these items occur in the same period,
they could have a material adverse effect on the results of
operations in a particular quarter or fiscal year.
Delphi
In connection with GM’s spin-off of Delphi Corporation
(Delphi) in 1999, GM entered into separate agreements with the
UAW, the IUE-CWA and the United Steel Workers (Benefit Guarantee
Agreements) providing contingent benefit guarantees to make
payments for limited pension and postretirement health care and
life insurance (OPEB) expenses to certain former GM
U.S. hourly employees who transferred to Delphi and meet
the eligibility requirements for such payments (Covered
Employees). Each Benefit Guarantee Agreement contains separate
benefit guarantees relating to pension and OPEB obligations,
with different triggering events under which GM could be liable
if Delphi fails to provide the corresponding benefit at the
required level. Therefore, GM could incur liability under one of
the guarantees (e.g., OPEB) without triggering the other
guarantees (e.g., pension). In addition, with respect to pension
benefits, GM’s guarantee of pension benefits arises only to
the extent that the pension benefits provided by Delphi and the
Pension Benefit Guaranty Corporation fall short of the
guaranteed amount. The original benefit guarantees were
scheduled to expire on October 18, 2007 unless Delphi
triggered the benefit guarantees before that date by failing to
provide the specified benefits. In a separate agreement between
GM and Delphi, Delphi has indemnified GM for any payments under
the Benefit Guarantee Agreements to the UAW employees and
retirees (Indemnification Agreement). GM’s rights under
this Indemnification Agreement were originally scheduled to
expire on October 18, 2007, or on the expiration of any
obligations of GM to provide benefits under the Benefit
Guarantees. As described more fully below, in June 2007 GM
agreed to extend the expiration date of the Benefit Guarantee
Agreement with the UAW, and Delphi agreed to extend the
expiration date of the Indemnification Agreement, under certain
circumstances and within certain time periods.
Although GM’s obligations under the Benefit Guarantee
Agreements have not been triggered by Delphi’s
Chapter 11 filing in October 2005 or its motion in
Bankruptcy Court to reject its U.S. labor agreements and
modify retiree welfare benefits, GM believes it is probable that
it has incurred a liability under the Benefit Guarantee
Agreements and has previously recorded charges, net of expected
recoveries, totaling $6 billion. The Benefit Guarantee
Agreements do not obligate GM to guarantee any benefits for
Delphi retirees in excess of the corresponding benefits GM
provides at the time to its own hourly retirees. Accordingly,
any reduction in the benefits GM provides its hourly retirees
reduces GM’s obligation under the corresponding benefit
guarantee.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 9.
Commitments
and Contingent Matters — (continued)
On June 22, 2007, GM, Delphi, and the UAW entered into a
Memorandum of Understanding (UAW MOU) which included terms
relating to the consensual triggering of the Benefit Guarantee
Agreement with the UAW as well as certain new terms relating to
Delphi’s restructuring. The UAW MOU was ratified by the UAW
membership on June 28, 2007 and became effective upon
receipt of Bankruptcy Court approval on July 19, 2007. The
more significant items covered in the UAW MOU include
(1) the extension of the GM-UAW benefit guarantee and the
related Delphi indemnity, (2) an additional attrition
program offered to Delphi UAW employees, (3) the settlement
by GM of a UAW claim against Delphi, (4) GM support for
future operations at certain Delphi sites, and
(5) GM’s agreement to provide additional benefits for
certain healthcare costs related to the Benefit Guarantee
Agreement with the UAW. These items are described more fully
below.
(1) GM agreed to extend the expiration date of the Benefit
Guarantee Agreement with the UAW from October 18, 2007 to
December 31, 2007. If Delphi has commenced solicitation of
acceptance of its plan of reorganization prior to
December 31, 2007, but the plan has not been confirmed and
substantially consummated by then, the Benefit Guarantee
Agreement with the UAW would be further extended to
March 31, 2008. Delphi agreed through the UAW MOU to extend
its agreement to indemnify GM for payments made under the
Benefit Guarantee Agreement with the UAW on the same basis and
for the same time period. GM also agreed that if Delphi
terminates its pension plan, ceases to provide on-going service,
or fails or refuses to provide post-retirement medical benefits
for certain UAW employees at any time before both (a) GM and
Delphi execute a comprehensive settlement agreement resolving
the financial, commercial and other matters between them
(GM-Delphi Settlement Agreement) and (b) the U.S. Bankruptcy
Court substantially confirms a Delphi plan of reorganization
that incorporates, approves and is consistent with the GM-Delphi
Settlement Agreement, the applicable provisions of the Benefit
Guarantee Agreement will be triggered for those UAW employees.
(2) Delphi and the UAW agreed to the terms of an additional
attrition program with terms substantially consistent with that
previously offered to GM and Delphi employees as described in
Note 7. GM’s financial contributions related to this
additional program are currently being negotiated as part of a
separate agreement with Delphi which has not yet been finalized
(GM-Delphi Settlement Agreement).
(3) GM committed to pay $450 million to settle a UAW
claim asserted against Delphi, which the UAW has directed GM to
pay directly to the GM UAW VEBA trust. GM expects to make this
payment upon execution of the GM-Delphi Settlement Agreement and
substantial consummation of Delphi’s reorganization plan,
confirmed by the Bankruptcy Court, which incorporates the
GM-Delphi Settlement Agreement.
(4) Delphi and the UAW agreed to plans to close certain
Delphi sites and divest others. GM has agreed to assist Delphi
with such closures and divestitures which, under certain
circumstances, may require GM to facilitate the transfer of
operations to third parties by specified dates. In addition,
Delphi and the UAW agreed to continue operating certain Delphi
sites at which GM will provide future product programs.
GM’s financial contributions related to these sites are
currently being negotiated as part of the GM-Delphi Settlement
Agreement.
(5) GM agreed to pay for certain healthcare costs of Delphi
retirees and their beneficiaries in order to provide a level of
benefits that is consistent with that being provided to GM
retirees and their beneficiaries from the Mitigation Plan VEBA.
The actuarially determined cost to GM of providing these
benefits is estimated to be approximately $360 million.
On August 5, 2007, GM, Delphi, and the IUE-CWA entered into
a Memorandum of Understanding (IUE-CWA MOU) which provides terms
that are similar to the UAW MOU with regard to establishing
terms related to the consensual triggering of the Benefit
Guarantee Agreement offering an additional attrition program,
and continuing operations at certain Delphi sites for which GM
committed to certain product programs. The IUE-CWA MOU is
subject to ratification by the IUE-CWA members and approval of
the Bankruptcy Court. The more significant items covered in the
IUE-CWA MOU include (1) an additional attrition program
offered to Delphi IUE-CWA employees,
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 9.
Commitments
and Contingent Matters — (continued)
and (2) GM provision of future product programs at certain
Delphi sites. These items are described more fully below.
(1) Delphi and the IUE-CWA agreed to an additional
attrition program with terms substantially consistent with that
previously offered to GM and Delphi employees as described in
Note 7. GM’s financial contributions related to this
additional program are currently being negotiated as part of a
separate agreement with Delphi which has not yet been finalized
(GM-Delphi Settlement Agreement).
(2) Delphi and the IUE-CWA agreed to continue operating
certain Delphi sites at which GM will provide future product
programs.
Under the GM-Delphi Settlement Agreement currently being
negotiated, GM expects to provide Delphi with funding in the
form of reimbursement of a portion of labor costs incurred by
Delphi to produce systems, components and parts for GM. GM
expects that this funding will result in future annual
labor-related payments of between $300 million and
$400 million which will be recognized as period costs as a
component of Automotive cost of sales. Also, GM expects to
provide cash support to certain Delphi facilities that are
producing systems, components and parts for GM. GM expects that
this funding will result in future annual facility cash support
payments of approximately $100 million, which will be
recognized in the future as incurred. In exchange for GM’s
commitment to provide labor cost and facility support, GM
expects to receive price reductions on certain products it has
and will continue to purchase from Delphi. Any such funding as
described and price reductions will take effect upon emergence
of Delphi from Bankruptcy and extend for a period that is still
subject to negotiation.
During the second quarter of 2007, as a result of finalizing the
UAW MOU and current negotiations with Delphi on the GM-Delphi
Settlement Agreement, GM recorded charges totaling
$575 million to increase its estimated liability under the
Benefit Guarantee Agreement with the UAW and to establish
liabilities for certain commitments in connection with the
Delphi reorganization plan.
On July 7, 2007, Delphi announced the termination of the
December 18, 2006 Plan Framework Support Agreement with GM
and a consortium of potential investors and the related
investment agreement. On July 18, Delphi announced that it
would seek bankruptcy court approval of an equity purchase and
commitment agreement (EPCA) with a modified investor group led
by Appaloosa Management L.P., which would be supported by GM as
well as both of Delphi’s Statutory Committees. On
August 2, 2007, the Bankruptcy Court as contemplated,
issued an order approving the EPCA. Under the terms of the EPCA
and the GM-Delphi Settlement Agreement, GM would release claims
against Delphi in exchange for $2.7 billion in cash and an
unconditional release of any alleged claims against GM by the
bankruptcy estate. This recovery has been included as a
reduction in the net loss accruals of $6.6 billion as of
June 30, 2007. In addition, GM will assume up to
$2 billion but not less than $1.5 billion of net
pension obligations of Delphi, and GM will receive a note
payable for the amount of the obligations assumed, which will be
payable in cash by Delphi on market terms within 10 days
after the plan of reorganization becomes effective. As with
other customers, certain GM claims related to ordinary business
would flow through the Chapter 11 proceedings and be
satisfied by Delphi after the reorganization in the ordinary
course of business.
In March 2006, Delphi also filed a motion under the
U.S. Bankruptcy Code seeking authority to reject certain
supply contracts with GM. A hearing on this motion was adjourned
indefinitely by the court pending further developments related
to Delphi’s U.S. labor agreements and retiree welfare
benefits. Although Delphi has not rejected any GM contracts as
of this time and has assured GM that it does not intend to
disrupt production at GM assembly facilities, there is a risk
that Delphi or one or more of its affiliates may reject or
threaten to reject individual contracts with GM, either for the
purpose of exiting specific lines of business or in an attempt
to increase the price GM pays for certain parts and components.
As a result, GM could be materially adversely affected by
disruption in the supply of automotive systems, components and
parts that could force the suspension of production
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 9.
Commitments
and Contingent Matters — (concluded)
at GM assembly facilities. The court order approving the UAW MOU
also settled Delphi’s motion to reject the U.S. labor
agreements with the UAW.
Since negotiations are not complete, the actual effect of the
resolution of issues related to Delphi cannot be determined
until the Bankruptcy Court’s approval of a comprehensive
resolution and plan of reorganization, and there can be no
assurance that the parties will reach a comprehensive resolution
and plan or Bankruptcy court will approve such a resolution and
plan, or that any resolution and plan will include the terms
described above.
Benefit
Guarantees Related to Divested Unit
GM has entered into various guarantees regarding benefits for
former GM employees at two previously divested plants that
manufacture component parts whose results continue to be
included in GM’s financial statements in accordance with
FIN 46(R), “Consolidation of Variable Interest
Entities” (FIN 46(R). For these divested plants, GM
entered into agreements with both of the purchasers to
indemnify, defend, and hold each purchaser harmless for any
liabilities arising out of the divested plants and with the UAW
guaranteeing certain postretirement health care benefits and
payment of postemployment benefits.
In October 2006, it was announced that production would cease at
these two plants which would permanently idle 2,000 workers.
Accordingly, during the fourth quarter of 2006, GM results
included a charge of $206 million comprised of the
following related to the closure of these plants: (1) a
$214 million charge to recognize wage and benefit costs
associated with employees accepting retirement packages,
buyouts, or supplemental unemployment benefit costs in
connection with the plant closure, (2) a curtailment loss
of $3 million related to pension benefits, and (3) a
curtailment gain of $11 million with respect to other
postretirement benefits. During the three and six months ended
June 30, 2007, GM recognized a favorable adjustment of
$6.4 million and $9 million, respectively, related to
the postemployment benefit reserve in connection with the plant
closures. Additionally, during the six months ended
June 30, 2007, GM recognized a $38.2 million
curtailment gain with respect to OPEB, which was recorded in the
first quarter of 2007.
Note 10.
Income
Taxes
Under Accounting Principles Board Opinion No. 28,
“Interim Financial Reporting,” GM is required to
adjust its effective tax rate for each quarter to be consistent
with the estimated annual effective tax rate. GM is also
required to record the tax impact of certain discrete items
(unusual or infrequently occurring), including changes in
judgment about valuation allowances and effects of changes in
tax laws or rates, in the interim period in which they occur. In
addition, jurisdictions with a projected loss for the year or a
year-to-date loss where no tax benefit can be recognized are
excluded from the estimated annual effective tax rate. The
impact of such an exclusion could result in a higher or lower
effective tax rate during a particular quarter, based upon the
mix and timing of actual earnings versus annual projections.
For the three and six months ended June 30, 2007, GM
recorded net favorable adjustments to income tax expense of
approximately $500 million, which resulted in the
recognition of an income tax benefit for these periods. These
favorable adjustments include: foreign income taxed at rates
lower than 35% (U.S. federal statutory tax rate); various
permanent book-tax differences; and discrete items such as the
reversal of valuation allowances and the reversal of previously
required tax liabilities in accordance with FIN 48 for
uncertain tax positions now deemed more-likely-than-not to be
realized.
Upon adoption of FIN 48 as of January 1, 2007, GM had
approximately $2.7 billion of total gross unrecognized tax
benefits, of which $2.1 billion represents the amount of
unrecognized tax benefits that, if recognized, would favorably
affect the effective income tax rate in future periods. At
June 30, 2007 the amount of gross unrecognized tax benefits
and the amount that would favorably affect the effective income
tax rate in future periods were
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 10.
Income
Taxes — (continued)
$2.6 billion and $1.7 billion, respectively. These
amounts consider the guidance in
FIN 48-1,
“Definition of Settlement in FASB Interpretation
No. 48”. At June 30, 2007, $1.4 billion of
the liability for uncertain tax positions is netted against
deferred tax assets relating to the same tax jurisdictions; the
remainder of the liability for uncertain tax positions is
classified as a non-current liability.
GM files income tax returns in multiple jurisdictions and is
subject to examination by taxing authorities throughout the
world. In the U.S., GM’s federal income tax returns for
2001 through 2003 are currently under review by the Internal
Revenue Service and, except for one transfer pricing matter, it
is reasonably possible that this examination will conclude in
2007. A pre-filing meeting was held with the Internal Revenue
Service on the transfer pricing matter in preparation for
bi-lateral negotiations. GM’s Mexican subsidiary has
recently received an income tax assessment related to the 2001
tax year covering warranty, tooling costs, and withholding
taxes. In addition, GM is currently under review in Australia,
China, France, Indonesia, India, Italy, Thailand, and Turkey,
and has received notices that tax audits will commence in
Germany, Portugal, Spain, and Taiwan. At June 30, 2007 it
is not possible to reasonably estimate the expected change to
the total amount of unrecognized tax benefits over the next
twelve months.
GM has open tax years from primarily 1999 to 2006 with various
significant taxing jurisdictions including the U.S., Australia,
Canada, Mexico, Germany, the United Kingdom, Korea and Brazil.
These open years contain matters that could be subject to
differing interpretations of applicable tax laws and regulations
as they relate to the amount, timing or inclusion of revenue and
expenses or the sustainability of income tax credits for a given
audit cycle. GM has recorded a tax benefit only for those
positions that meet the more-likely-than-not standard.
GM’s continuing practice is to recognize interest on
uncertain tax positions in Automotive and other interest expense
and penalties in Selling, general, and administrative expense.
For the three and six months ended June 30, 2007, GM
reduced accrued interest expense by $193.9 million and
$179.8 million and accrued penalties of $3.3 million
and $10.8 million, respectively. Interest and penalties of
$81.9 million and $6.4 million were reversed for the
three months ended June 30, 2007 as a result of the
expiration of statutes in a number of countries as well as other
amounts becoming effectively settled. In addition, interest
income totaling $122 million was recorded in connection
with the above mentioned transfer pricing matter. Accrued
interest and penalties as of January 1, 2007 were
$210.3 million and $75.6 million, respectively, and as
of June 30, 2007 accrued interest and penalties were
$42.9 million and $69.1 million, respectively.
In July 2007, new tax laws were passed or enacted in the United
Kingdom, Germany, as well as in the State of Michigan, which
will impact GM’s operations in these jurisdictions.
In July 2007, the United Kingdom enacted legislation to lower
its statutory corporate tax rate from 30% to 28%, effective
April 1, 2008.
In July 2007, the German Parliament passed legislation to lower
its statutory corporate tax rate. It is anticipated that the
President will sign the legislation, and it will become law
sometime during the third quarter of 2007. The legislation
provides for a reduction of approximately 9%, effective as of
January 1, 2008, in the combined German statutory tax rate,
which consists of the corporate tax rate, the local trade tax
rate, and the solidarity levee tax rate.
Note 10.
Income
Taxes — (concluded)
The anticipated adjustments for Germany and the United Kingdom,
which management is currently analyzing, will reduce the net
deferred tax asset and increase income tax expense by a range of
approximately $500 million to $700 million during the
third quarter of 2007.
In July 2007, the State of Michigan enacted a substantial change
to its corporate tax structure. The tax law change includes the
elimination of the Single Business Tax (SBT) and the creation of
an income tax and a modified
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
gross receipts tax. The new taxes will be effective
January 1, 2008. Due to the complex change in the tax law
in Michigan, we are still evaluating the impact the change will
have on GM’s result of operations and financial condition.
Note 11.
Earnings
Per Share
Basic earnings per share has been computed by dividing income
(loss) from continuing operations by the weighted average number
of shares outstanding during the period. Diluted earnings per
share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock. Common shares
potentially issuable under contingently convertible debt are
included in computing diluted EPS using the average share price
for the period similar to the treasury stock method.
The reconciliation of the amounts used in the basic and diluted
earnings per share computations is as follows (in millions,
except per share amounts).
Incremental effect of shares from
exercise of stock options and vesting of restricted stock units
3
—
3
—
Average number of dilutive shares
outstanding
569
566
569
566
Basic income (loss) per share from
continuing operations
$
1.38
$
(6.18
)
$
1.31
$
(5.31
)
Incremental effect of exercise of
stock options and vesting of restricted stock units
(.01
)
—
(.01
)
—
Diluted income (loss) per share
from continuing operations
$
1.37
$
(6.18
)
$
1.30
$
(5.31
)
Certain stock options with exercise prices that exceed the fair
market value of GM’s common stock had an antidilutive
effect and therefore were excluded from the computation of
diluted earnings per share. The number of such shares not
included in the computation of diluted earnings per share were
93 million and 107 million at June 30, 2007 and
2006, respectively.
GM has contingently convertible debentures of $2.6 billion
principal amount of 5.25% Series B due in 2032,
$4.3 billion principal amount of 6.25% Series C due in
2033 and $1.5 billion principal amount of 1.50%
Series D due in 2009 outstanding that, if converted in the
future, would have a potentially dilutive effect on GM’s
common stock. GM has unilaterally and irrevocably waived and
relinquished its right to use stock, and has committed to use
cash, to settle the principal amount of the debentures if
holders choose to convert the debentures or GM is required by
holders to repurchase the debentures. GM retains the right to
use either cash or stock to settle any amount that may become
due to debt holders in excess of the principal amount for all
outstanding convertible debentures. As of June 30, 2007 and
2006, shares potentially issuable under these debentures,
including those shares issuable pursuant to the convertible note
hedge related to the Series D convertible debentures, were
excluded from the computation of diluted earnings per share as
the effect is antidilutive under the treasury stock method.
On March 6, 2007, Series A convertible debentures in
the amount of $1.1 billion were put to GM and settled
entirely in cash.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 12.
Depreciation
and Amortization
Depreciation and amortization, including asset impairment
charges, included in Automotive cost of sales, Selling, general,
and administrative expense, and Financial services and insurance
expense were as follows:
GM recognized the funded status of its benefit plans at
December 31, 2006 in accordance with the recognition
provisions of SFAS No. 158. Additionally, GM elected
to early adopt the measurement date provisions of
SFAS No. 158 at January 1, 2007. Those provisions
require the measurement date for plan assets and liabilities to
coincide with the sponsor’s year end. Using the
“two-measurement” approach for those defined benefit
plans where the measurement date was not historically consistent
with GM’s year-end, GM recorded a decrease to Retained
earnings of $.7 billion, or $.4 billion after-tax,
representing the net periodic benefit cost for the period
between the measurement date utilized in 2006 and the beginning
of 2007, which previously would have been recorded during the
three months ended March 31, 2007 on a delayed basis. GM
also performed a measurement at January 1, 2007 for those
benefit plans whose previous measurement dates were not
historically consistent with GM’s year-end. As a result of
the January 1, 2007 measurement, GM recorded an increase to
Accumulated other comprehensive income of $2.3 billion, or
$1.5 billion after-tax, representing other changes in the
fair value of the plan assets and the benefit obligations for
the period between the measurement date utilized in 2006 and
January 1, 2007. These amounts are offset principally by an
immaterial adjustment of $400 million, or $250 million
after-tax, to correct certain demographic information used in
determining the amount of the cumulative effect of a change in
accounting principle reported at December 31, 2006 to adopt
the recognition provisions of SFAS No. 158.
Effective March 31, 2006, the U.S. District Court for
the Eastern District of Michigan approved the tentative
settlement agreement with the UAW (UAW Settlement Agreement)
related to reductions in hourly retiree health care. The UAW
Settlement Agreement will remain in effect until at least
September 2011, after which either GM or the UAW may cancel the
agreement upon 90 days written notice. Similarly, GM’s
contractual obligations to provide health care benefits to UAW
hourly retirees extends to at least September 2011 and will
continue thereafter until terminated by either GM or the UAW. As
a result, the provisions of the UAW Settlement Agreement will
continue in effect for the UAW retirees beyond the expiration in
September 2007 of the current collective bargaining agreement
between GM and the UAW. Given the significance of the effect of
the UAW Settlement Agreement, the plans were remeasured in March
2006. The remeasurement of the U.S. hourly OPEB plans as of
March 31, 2006 due to the UAW Settlement Agreement
generated a $1.3 billion reduction in OPEB expense for the
remaining periods in 2006 and reduced the U.S. APBO by
$14.5 billion. The effects of the settlement were recorded
beginning in the third quarter of 2006.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 13.
Pensions
and Other Postretirement
Benefits — (concluded)
The UAW Settlement Agreement also provides that GM make
contributions to a new independent Voluntary Employees’
Beneficiary Association (VEBA) (Mitigation Plan). The assets of
the Mitigation Plan will be used to mitigate the effect of
reduced GM health care coverage on individual UAW retirees and,
depending on the level of mitigation, are expected to be
available for a number of years. The new independent Mitigation
Plan is being partially funded by GM contributions of
$1 billion in each of 2006, 2007 and 2011. The 2011
contribution may be accelerated under specified circumstances.
GM will also make future contributions subject to provisions of
the UAW Settlement Agreement that relate to profit sharing
payments, increases in the value of a notional number of shares
of GM’s common stock (collectively, the Supplemental
Contributions), as well as wage deferral payments and dividend
payments. GM made $1 billion contributions to the
independent VEBA in both the second quarter of 2007 and 2006.
As detailed in Note 7, GM, Delphi, and the UAW reached an
agreement on March 22, 2006 which intended to reduce the
number of U.S. hourly employees through the Attrition
Program. As a result of the Attrition Program, GM has recognized
curtailment losses under SFAS No. 88,
“Employers’ Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits” and SFAS No. 106,
“Employers’ Accounting for Postretirement Benefits
Other Than Pensions” due to the significant reduction in
the expected aggregate years of future service of the employees
in the U.S. hourly pension, OPEB and extended disability
plans, respectively. The curtailment losses include recognition
of the change in the projected benefit obligation (PBO) or APBO
and a portion of the previously unrecognized prior service cost
reflecting the reduction in expected future service. GM
recognized a curtailment loss related to the U.S. hourly
pension plan of approximately $4.4 billion at
April 30, 2006. The impact of the curtailment loss related
to the U.S. hourly OPEB plans measured at May 31, 2006
as a result of the Attrition Program was recorded in the third
quarter of 2006.
The remeasurement of GM’s U.S. hourly pension plan as
of April 30, 2006 as a result of the Attrition Program
generated a $.2 billion reduction in pension expense for
the three and six months ended June 30, 2006. This
remeasurement reduced the U.S. pension PBO by
$1.2 billion. The remeasurement of the U.S. hourly
OPEB plans as of May 31, 2006 as a result of the Attrition
Program generated a change in OPEB expense beginning in the
third quarter of 2006. Accordingly, OPEB expense for the three
months ended June 30, 2006 does not reflect any amounts
associated with the hourly OPEB plan remeasurement.
Note 14.
Impairments,
Restructuring and Other Initiatives
Impairments
During the three and six months ended June 30, 2007, GM
recorded impairment charges primarily related to product
specific assets totaling $100 million and
$109 million, respectively. Of this, $95 million was
at GMNA and $5 million was at GMAP for the three months
ended June 30, 2007. The remaining $9 million recorded
during the six months ended June 30, 2007 related to
product specific impairments at GMAP recorded in the first
quarter of 2007. These impairments were based on GM’s
periodic review of its long lived assets classified as held and
used.
During the three and six months ended June 30, 2006, GM
recorded impairment charges totaling $363 million related
to product specific assets. Of this, $303 million was at
GMNA and $60 million was at GME. In addition, GM recorded
an asset impairment charge of $84 million for the three and
six months ended June 30, 2006, in connection with the
announced closure of GM’s Portugal assembly plant, which
closed in December 2006.
Restructuring
and Other Initiatives
GME results for the three and six months ended June 30,2007 include charges for separation programs of $30 million
and $87 million, respectively. Charges of $27 million
and $70 million were recorded in the three and six months
ended June 30, 2007, respectively, primarily related to
early retirement programs, along with additional
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 14.
Impairments,
Restructuring and Other
Initiatives — (concluded)
minor separations under other current programs in Germany.
Approximately 5,000 employees will leave under early
retirement programs in Germany through 2013. The cost for the
early retirements will be recognized over the remaining service
period of the employees. Additionally, a charge of
$3 million was recorded in the quarter ended June 30,2007 primarily relating to the separation of 400 temporary
employees in Belgium. The remaining separation charges for the
six months ended June 30, 2007 related to separations in
Sweden, the closure of GM’s Portugal assembly plant, and
the shift reduction at the Ellesmere Port plant in the United
Kingdom. These separation programs are substantially complete at
June 30, 2007.
GME results for the three and six months ended June 30,2006 included charges for separations and contract cancellations
of $129 million and $176 million, respectively. The
most significant charges in the three and six months ended
June 30, 2006 totaling $61 million and
$108 million, respectively, relate to the restructuring
plan for the operations in Germany announced in the fourth
quarter of 2004. The remaining charges totaling $68 million
for the three and six months ended June 30, 2006 relate to
the closure of GM’s assembly plant in Portugal and the
reduction of one shift at the Ellesmere Port plant in the United
Kingdom.
GMAP results for the three and six months ended June 30,2007 include a charge for separation programs of $8 million
and $48 million, respectively, at its Australian
facilities. This charge relates to the voluntary separation of
approximately 650 employees.
GMNA results for the three and six months ended June 30,2006 included a charge of $100 million related to wage and
benefit costs incurred under a salaried severance program, which
allowed involuntarily terminated employees to receive continued
salary and benefits for a period of time after termination.
GMLAAM results for the three and six months ended June 30,2006 include restructuring charges of $16 million and
$43 million, respectively. These restructuring charges
relate to the costs of voluntary employee separations at
GM’s facilities in Brazil.
Note 15.
Restatement
of Previously Issued Condensed Consolidated Financial
Statements
As previously disclosed in our 2006 Annual Report on
Form 10-K,
GM has restated its prior years consolidated financial
statements. As such, the accompanying Condensed Consolidated
Financial Statements in this Quarterly Report on
Form 10-Q
as of and for the three months and six months ended
June 30, 2006 have been restated to correct the accounting
for certain derivative transactions under SFAS No. 133
“Accounting for Derivative Instruments and Hedging
Activities” as amended (SFAS No 133), and various
other accounting adjustments.
Additionally, the Condensed Consolidated Financial Statements
have been further adjusted as GM has entered into a definitive
agreement to sell the commercial and military business of our
Allison Transmission division. The operations of Allison have
been accounted for as discontinued operations for the three and
six months ended June 30, 2006. For additional information
concerning the sale of Allison, refer to Note 3.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 15.
Restatement
of Previously Issued Condensed Consolidated Financial
Statements — (continued)
The following table sets forth a reconciliation of the
previously reported and restated net loss for the three and six
months ended June 30, 2006, respectively:
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 15.
Restatement
of Previously Issued Condensed Consolidated Financial
Statements — (continued)
The following table sets forth a reconciliation of previously
reported and restated loss per share for the three months and
six months ended June 30, 2006:
In reviewing the accounting for certain commodity purchase
contracts, GM determined that it had incorrectly concluded that
the “normal purchases and normal sales” scope
exception in paragraph 10(b) of SFAS No. 133
applied. Therefore, these commodity purchase contracts should
have been accounted for as derivatives. The financial statements
have been restated to record the fair value of these purchase
contracts in the 2006 Condensed Consolidated Balance Sheet and
record the changes in the fair value of the commodity contracts
as charges or credits in the Condensed Consolidated Statements
of Operations. As a result of the restatement, additional
derivative assets of $268.8 million were recorded at
June 30, 2006. Additionally, pre-tax earnings were
increased, through a reduction of Automotive cost of sales, by
$17 million ($11 million after tax) and
$97.1 million ($63.1 million after tax) for the three
and six months ended June 30, 2006, respectively.
Additionally, GM entered into various commodity derivatives
contracts, including swaps and options, to hedge its forecasted
purchases of precious and non-ferrous metals and energy. These
commodity derivatives were designated as cash flow hedges. Under
SFAS No. 133, hedge accounting is appropriate only for
those hedging relationships that a company expects will be
highly effective in achieving offsetting changes in fair value
or cash flows attributable to the risk being hedged. To
determine whether transactions satisfy these requirements,
companies must periodically assess and document the
effectiveness of their hedging relationships both
retrospectively and prospectively and measure and recognize any
ineffectiveness. For certain commodity cash flow hedges, GM
inappropriately applied the “matched terms” method of
assessing hedge effectiveness as outlined in paragraph 65
of SFAS No. 133 by not considering in its assessment
certain terms of the underlying commodity contracts that created
ineffectiveness in the cash flow hedging relationship. In
addition, for other commodity cash flow hedges, GM did not
properly document the hedging relationship or properly perform
the periodic retrospective assessment of effectiveness necessary
to qualify for hedge accounting or properly measure hedge
ineffectiveness, and did not properly reclassify amounts from
Accumulated other comprehensive income (AOCI) when the
underlying hedged forecasted transaction affected earnings.
Accordingly, the commodity derivatives should have been
marked-to-market with gains and losses recorded in Automotive
cost of sales. Changes in the fair value of the
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 15.
Restatement
of Previously Issued Condensed Consolidated Financial
Statements — (continued)
commodity derivatives that had been recorded in OCI as part of
these cash flow hedging relationships were reversed and recorded
in Automotive cost of sales. Pre-tax earnings were increased
through a reduction of Automotive cost of sales, by
$49.5 million ($32.2 million after tax) and
$319.6 million ($207.7 million after tax) for the
three and six months ended June 30, 2006, respectively.
GM enters into foreign currency forward contracts and
cross-currency swaps to hedge foreign-currency-denominated debt
and forecasted transactions. GM also designates
foreign-currency-denominated debt as hedges of net investments
in foreign operations.
GM concluded that it did not properly apply the “matched
terms” method of assessing hedge effectiveness as outlined
in paragraph 65 of SFAS No. 133, inadequately
measured hedging effectiveness and lacked contemporaneous hedge
documentation and, therefore, incorrectly applied hedge
accounting to certain cash flow hedges and net investment
hedges. The changes in fair value of certain derivatives used in
cash flow hedging relationships and amounts related to a net
investment hedge previously recorded in AOCI were released from
OCI and recorded in Automotive cost of sales. Pre-tax earnings
were increased by $34.3 million ($22.3 million after
tax) and $117.9 million ($76.6 million after tax) for
the three and six months ended June 30, 2006, respectively.
In addition, GM determined it incorrectly applied cash flow
hedge accounting treatment to one of two concurrent offsetting
derivatives by accounting for the two derivatives separately
instead of treating them as one combined arrangement in
accordance with SFAS No. 133, “Implementation
Issue F6, Concurrent Offsetting Matching Swaps and Use of One as
Hedging Instrument”, and SFAS No. 133,
“Implementation Issue K1, Determining Whether Separate
Transactions Should Be Viewed as a Unit”. The changes in
fair value of the derivatives used in this hedging strategy
previously accounted for as cash flow hedges were released from
AOCI and recorded in Automotive cost of sales. Pre-tax earnings
were decreased by $46.8 million ($30.4 million after
tax) and $15.7 million ($10.2 million after tax) for
the three and six months ended June 30, 2006, respectively.
GMAC determined that its hedge accounting documentation and
hedge effectiveness assessment methodologies did not meet the
requirements of paragraph 20(b) of SFAS No. 133
for certain hedges of callable fixed rate debt instruments.
Under SFAS No. 133, hedge accounting is appropriate
only for those hedging relationships that a company has a
sufficiently documented expectation that such relationship will
be highly effective in achieving offsetting changes in fair
values attributable to the risk being hedged at the inception of
the hedging relationship. To determine whether transactions
satisfy these requirements, a company must periodically assess
the effectiveness of its hedging relationships both
prospectively and retrospectively. After review, GMAC determined
that the interest rate derivatives did not qualify for hedge
accounting. Accordingly, hedge accounting should not have been
applied to any of the hedging relationships in this strategy and
therefore, market value adjustments on the debt instruments
included in the hedging relationships related to changes in fair
value due to movements in the designated benchmark interest rate
should not have been recorded. Changes in the fair value of the
debt instruments recorded in earnings under these fair value
hedge relationships were reversed. Pre-tax earnings were
decreased, through an increase to Interest expense, by
$192.3 million ($125 million after tax) and
$383 million ($249 million after tax) for the three
and six months ended June 30, 2006, respectively.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 15.
Restatement
of Previously Issued Condensed Consolidated Financial
Statements — (continued)
Other
Out-of-Period Adjustments
Also, GM identified adjustments that should have been recorded
in the three and six months ended June 30, 2006. Upon
identification, GM determined these adjustments to be
immaterial, individually and in the aggregate, to our previously
filed Condensed Consolidated Financial Statements, and recorded
these out-of-period adjustments in the periods in which they
were identified. Due to the adjustments that required a
restatement of our previously filed Condensed Consolidated
Financial Statements, GM is correcting these out-of-period
adjustments by recording them in the proper periods.
The out-of-period adjustments in the table above include the
following:
Unemployment benefit payments. Subsequent to
December 31, 2005 but prior to the issuance of our 2005
consolidated financial statements, we were notified by the
German Labor Office that we were released from certain
contingent unemployment benefit payment obligations. We
initially recorded the release from these obligations in the
three months ended March 31, 2006. We subsequently
determined that the adjustment should have been recorded in the
three months ended December 31, 2005. Accordingly, as part
of our restatement, pre-tax earnings were decreased, through an
increase of Automotive cost of sales, by $50.2 million
($31.1 million after tax) for the six months ended
June 30, 2006, respectively.
Automotive revenue recognition. We recorded an
adjustment to correct deferred revenue related to data disks
provided to customers to update their vehicle’s
navigational system. We did not compute deferred revenue using
fair value as determined by vendor specific objective evidence
as required by
EITF 00-21,
“Revenue Arrangements with Multiple Deliverables”.
Additionally, we did not defer revenue on the correct number of
2006 model year vehicles containing navigation systems. As part
of our restatement, pre-tax earnings were decreased, through a
reduction of Automotive sales, by $21.9 million
($14.2 million after-tax) and $43.3 million
($28.1 million after tax) for the three and six months
ended June 30, 2006, respectively.
Development costs. We recorded an adjustment to
correctly expense supplier development costs. As part of our
restatement, pre-tax and after-tax earnings were increased,
through a reduction of Automotive cost of sales, by
$56.7 million for the six months ended June 30, 2006.
Advertising expenses. Under our cooperative
advertising program with our dealers, we are obligated to match
a portion of the funds contributed by our dealers for
advertising. We recorded an adjustment to correctly reflect the
timing of our obligation under this arrangement. Previously, our
matching portion of the advertising costs was expensed as
incurred. As part of our restatement, pre-tax earnings were
decreased, through an increase to Selling, general, and
administrative expenses, by $4.5 million ($2.9 million
after-tax) and $39.8 million ($25.9 million after-tax)
for the three and six months ended June 30, 2006,
respectively.
Gain on sale of equity method investment. We
erroneously calculated the gain on the sale of a portion of an
equity method investment. As part of our restatement, pre-tax
earnings were increased by $36 million ($23.4 million
after-tax) for the six months ended June 30, 2006.
Employee related costs. We erroneously recorded
employee-related costs related to the Attrition Program and
restructuring activities at GME. As part of our restatement,
pre-tax earnings were decreased, through an increase to
Automotive cost of sales, by $52.1 million
($32.3 million after-tax) for the six months ended
June 30, 2006.
Manufacturing utilities costs. We recorded an
adjustment to correctly expense manufacturing utilities costs.
As part of our restatement, pre-tax earnings were increased by
$15.2 million ($9.9 million after-tax) and
$22.9 million ($14.9 million after-tax) for the three
and six months ended June 30, 2006, respectively.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 15.
Restatement
of Previously Issued Condensed Consolidated Financial
Statements — (continued)
Extended disability curtailment costs. We recorded
an adjustment to correctly state the extended disability
curtailment costs based on updated actuarial assumptions. As
part of our restatement, pre-tax earnings were increased by
$52 million ($33.8 million after-tax) for the three
and six months ended June 30, 2006.
Special attrition program charge. We recorded an
adjustment to correctly state the special attrition program
expense as a result of the review of employees’
eligibility. As part of our restatement, pre-tax earnings were
increased by $28 million ($18.2 million after-tax) for
the three and six months ended June 30, 2006.
Extended warranty deferred revenue. We recorded an
adjustment to correctly state deferred revenue as a result of
the review of prior years’ sales. As part of our
restatement, pre-tax earnings were decreased by
$14.5 million ($9.4 million after-tax) and
$17.5 million ($11.4 million after-tax) for the three
and six months ended June 30, 2006, respectively. This
adjustment affected the earnings of the Allison Transmission
business.
Credit card. We recorded an adjustment to
appropriately defer credit card revenue in accordance with Staff
Accounting Bulletin No. 104 “Revenue
Recognition” (SAB 104). As a result, we recorded an
adjustment in the fourth quarter of 2006 to reverse
$127.7 million of revenue which was then allocated to and
recorded in the appropriate prior periods. As part of our
restatement, pre-tax earnings were increased by
$10.7 million ($7 million after-tax) and
$20 million ($13 million after-tax) for the three and
six months ended June 30, 2006, respectively.
We also recorded other less significant out-of-period pre-tax
and income tax adjustments, the net effect of which increased
pre-tax earnings by $66 million and $52.3 million and
increased after-tax earnings by $43.3 million and
$42.3 million for the three and six months ended
June 30, 2006, respectively.
In addition to the above adjustments, to comply with
EITF 00-10,
“Accounting for Shipping and Handling Fees and Costs”
(EITF 00-10),
in 2006 GM reclassified shipping and handling costs incurred to
transport product to its customers. The correction for this
reclassification increased Automotive sales and Automotive cost
of sales by $1.1 billion and $2.1 billion for the
three and six months ended June 30, 2006, respectively.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 15.
Restatement
of Previously Issued Condensed Consolidated Financial
Statements — (continued)
The following is a summary of the effect of the restatement on
the originally issued Condensed Consolidated Statements of
Operations and Condensed Consolidated Balance Sheet:
Automotive interest income and
other non-operating income
1,013
987
1,860
1,783
Income before (loss) from
continuing operations before income taxes, other equity income
and minority interests
(5,391
)
(5,368
)
(4,995
)
(4,789
)
Income tax benefit
(1,724
)
(1,715
)
(1,594
)
(1,546
)
Equity income and minority
interests, net of tax
168
159
235
242
Loss from continuing
operations
(3,499
)
(3,494
)
(3,166
)
(3,001
)
Income from discontinued
operations, net of tax
120
111
232
220
Net loss
$
(3,379
)
$
(3,383
)
$
(2,934
)
$
(2,781
)
Basic earnings (loss) per
share:
Continuing operations
$
(6.18
)
$
(6.18
)
$
(5.59
)
$
(5.31
)
Discontinued operations
.21
.20
.41
.39
Total
$
(5.97
)
$
(5.98
)
$
(5.18
)
$
(4.92
)
Weighted average common shares
outstanding, basic (millions)
566
566
566
566
Diluted earnings (loss) per
share:
Continuing operations
$
(6.18
)
$
(6.18
)
$
(5.59
)
$
(5.31
)
Discontinued operations
.21
.20
.41
.39
Total
$
(5.97
)
$
(5.98
)
$
(5.18
)
$
(4.92
)
Weighted average common shares
outstanding, diluted (millions)
566
566
566
566
(a)
The previously reported and reclassified columns have been
restated to reflect Allision as discontinued operations for the
three and six months ended June 30, 2006.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 16.
Segment
Reporting
GM operates in two businesses, consisting of Automotive (GM
Automotive or GMA) and Financing and Insurance Operations (FIO).
GM’s four automotive regions consist of GMNA, GME, GMLAAM
and GMAP. For the three and six months ended June 30, 2007,
GM’s FIO business primarily consists of its 49% share of
GMAC’s operating results, which we accounted for under the
equity method, and two special purpose entities holding
automotive leases previously owned by GMAC and its affiliates
that were retained by GM, as well as the elimination of
intercompany transactions with GM Automotive and Corporate and
Other. For the three and six months ended June 30, 2006,
GM’s FIO business consists of the consolidated operating
results of GMAC’s lines of business: Automotive Finance
Operations, Mortgage Operations; Insurance, and Other, which
includes its Commercial Finance business and GMAC’s equity
investment in Capmark (previously GMAC Commercial Finance). Also
included in FIO is Other Financing, which consists of the equity
earnings of financing entities that are not consolidated by GMAC
as well as the elimination of intercompany transactions with GM
Automotive and Corporate and Other. Corporate and Other includes
the elimination of intersegment transactions, certain
non-segment specific revenues and expenditures, including costs
related to postretirement benefits for Delphi and other
retirees, and certain corporate activities.
In 2007, GM changed its segment presentation to reflect the
elimination of transactions occurring between GM Automotive
regions, previously included in the GMNA region, in the Auto
Eliminations column within total GMA. These transactions consist
primarily of intra-segment vehicle and service parts sales in
accordance with GM’s transfer pricing policy. Accordingly,
2006 amounts have been revised for comparability. Additionally,
the three and six months ended June 30, 2006, have been
reclassified for the retroactive effect of discontinued
operations. Refer to Note 3.
Refer to Note 5 for summarized financial information of
GMAC for the three and six months ended June 30, 2007.
Note 17.
Transactions
with GMAC
GM has entered into various operating and financing arrangements
with GMAC. The nature and terms of these arrangements were
negotiated at arm’s length. The following describes the
transactions and related impacts that occurred between GM and
GMAC for the three and six month periods ended June 30,2007 that have not been eliminated in GM’s Condensed
Consolidated Financial Statements:
Marketing
Incentives and Operating Lease Residuals
As a marketing incentive, GM may sponsor interest rate support,
capitalized cost reduction and residual support programs as a
way to lower customers’ monthly lease and retail contract
payments. In addition GM may sponsor lease pull-ahead programs
to encourage customers to terminate their leases early in
conjunction with the acquisition of a new GM vehicle.
Under the interest rate support program, GM pays an amount to
GMAC at the time of lease or retail contract origination to
adjust the interest rate implicit in the lease or retail
contract below GMAC’s standard interest rate. Such
marketing incentives are referred to as rate support or
subvention and the amount paid at contract origination
represents the present value of the difference between the
customer rates and the GMAC standard rates.
Under the capitalized cost reduction program, GM pays an amount
to GMAC at the time of lease or retail contract origination to
reduce the principal amount implicit in the lease or retail
contract below GM’s standard MSRP (manufacturers suggested
retail price) value.
Under the residual support program, the customers’
contractual residual value is adjusted above GMAC’s
standard residual values. GM reimburses GMAC to the extent that
sales proceeds are less than the customers’ contractual
residual value, limited to GMAC’s standard residual value.
As it relates to U.S. lease originations and
U.S. balloon retail contract originations occurring after
April 30, 2006 that GMAC retained after the consummation of
the GMAC sale, GM agreed to begin payment of the present value
of the expected residual support owed to GMAC at the time of
contract origination as opposed to after contract termination
when the related used vehicle is sold. The residual support
amount owed to GMAC is adjusted as the contracts terminate and,
in cases where the estimate is adjusted, GM may be obligated to
pay GMAC or GMAC may be obliged to reimburse GM. At
June 30,
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 17.
Transactions
with GMAC — (continued)
2007 the maximum additional amount that could be paid by GM
under the residual support programs is approximately
$662 million. GM’s assessment is that it would be
unlikely that the proceeds from the entire portfolio of assets
would be lower than both the contractual residual value and
GMAC’s standard residual rates.
Under the lease pull-ahead program, customers are encouraged to
terminate their leases early in conjunction with the acquisition
of a new GM vehicle. As part of this program, GMAC waives the
customer’s remaining payment obligation under their current
lease, and GM compensates GMAC for any foregone revenue from the
waived payments. Since these programs generally accelerate the
re-sale of the vehicle, the proceeds are typically higher than
otherwise would have been realized had the vehicle been sold at
the contract maturity. The reimbursement to GMAC for the
foregone payments is reduced by the amount of this benefit. GM
makes anticipated payments to GMAC at the end of each month
following lease termination. As with residual support payments
discussed above, these estimates are adjusted to actual once all
vehicles that could have been pulled ahead have terminated and
the vehicles have been resold. To the extent that the original
estimates were adjusted, GM or GMAC may be obligated to pay each
other the difference, as appropriate under the lease pull-ahead
programs.
In addition to the interest rate support, capitalized cost
reduction, residual support and lease pull-ahead programs, GM
also participates in a risk sharing arrangement that was amended
on November 30, 2006 and applies to all new lease
contracts. GM is responsible for risk sharing on returns of
lease vehicles in the U.S. and Canada whose resale proceeds
are less than standard GMAC residual values, subject to a
limitation. GM will also pay GMAC a quarterly leasing payment in
connection with the agreement beginning in the first quarter of
2009 and ending in the fourth quarter of 2014. At June 30,2007, the maximum amount guaranteed under the risk sharing
arrangement is $781 million and would only be paid in the
unlikely event that the proceeds from all outstanding lease
vehicles would be lower than GMAC’s standard residual
rates, subject to the limitation.
In accordance with GM’s revenue recognition accounting
policy, the marketing incentives, apart from the lease
pull-ahead programs, as well as the risk sharing arrangement,
are accrued as reductions to Automotive sales at the time of the
sale of the vehicle to the dealers based on the estimated GMAC
lease and retail contract penetration. The lease pull-ahead
programs are accrued as reductions to Automotive sales when the
specific lease pull-ahead program is announced. GM paid
$1.2 billion and $2.2 billion under these programs
during the three and six months ended June 30, 2007,
respectively.
The terms and conditions of interest rate support, capitalized
cost reduction, residual support and lease pull-ahead programs,
as well as the risk sharing arrangement, are included in the
U.S., Canadian, and International Consumer Financing Services
Agreements, which expire in November 2016.
Operating
Lease Assets Transferred to GM by GMAC
In November 2006, GMAC transferred to GM certain U.S. lease
assets, along with related debt and other assets. GMAC retained
an investment in a note, which had a balance of
$406 million at June 30, 2007, and is secured by the
lease assets transferred to GM. GMAC will continue to service
the leased assets and related debt on behalf of GM and receive a
servicing fee. GMAC is obligated as servicer to repurchase any
leased asset that is in breach of any of the covenants in the
securitization agreements. In addition, in a number of the
transactions securitizing the lease assets, the trusts issued
one or more series of floating rate debt obligations and entered
into derivative transactions to eliminate the market risk
associated with funding the fixed payment lease assets with
floating interest rate debt. To facilitate these securitization
transactions, GMAC entered into secondary derivative
transactions with the primary derivative counterparties,
essentially offsetting the primary derivatives. As part of the
transfer, GM assumed the rights and obligations of the primary
derivative while GMAC retained the secondary, leaving both
companies exposed to market value movements of their respective
derivatives. GM and GMAC
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 17.
Transactions
with GMAC — (continued)
subsequently entered into derivative transactions with each
other that are intended to offset the exposure each party has to
its component of the primary and secondary derivatives.
Exclusivity
Arrangement
Subject to GMAC’s fulfillment of certain conditions, GM has
granted GMAC exclusivity for U.S., Canadian, and international
GM-sponsored consumer and wholesale marketing incentives for GM
products in specified markets around the world, with the
exception of Saturn branded products. In return for this
exclusivity, GMAC will pay GM an annual exclusivity fee of
$105 million ($75 million for the U.S. retail
business, $15 million for the Canadian retail business,
$10 million for retail business in international
operations, and $5 million for the dealer business) and is
committed to provide financing to GM customers and dealers
consistent with historical practices. The amount of exclusivity
fee revenue recognized by GM for the three and six months ended
June 30, 2007 was $26.3 million and
$52.5 million, respectively.
Marketing
Service Agreement
GM and GMAC have entered into a 10 year marketing,
promoting, advertising, and customer support arrangement related
to GM products, GMAC products and the retail financing for GM
products. This agreement expires in November 2016.
Royalty
Arrangement
For certain insurance products, GM and GMAC have entered into
10 year intellectual property license agreements giving
GMAC the right to use the GM name on certain insurance products.
In exchange, GMAC will pay a royalty fee of 3.25% of revenue,
net of cancellations, related to these products with a minimum
annual guarantee of $15 million. The amount of royalty
recognized for the three and six months ended June 30, 2007
was $4.4 million and $8.9 million, respectively.
Shared
and Transition Services Agreement
GM and GMAC entered into a Shared and Transition Services
Agreement to continue to provide to each other global support
services, primarily treasury, tax, real estate, and human
resources, for a transition period of 1 to 2 years from the
transaction date. GM expects that when the Shared and Transition
Services Agreement expires, GM and GMAC will either renew this
services agreement or GM and GMAC will perform the related
services internally or potentially outsource to other providers.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
Note 17.
Transactions
with GMAC — (concluded)
Balance
Sheet
A summary of the balance sheet effects of transactions with GMAC
at June 30, 2007 are as follows (dollars in millions):
Assets:
Accounts and notes receivable(a)
$
1,245
Other assets(b)
97
Liabilities:
Accounts payable(c)
621
Short-term borrowings and current
portion of long-term debt(d)
2,870
Accrued expenses(e)
63
Long-term debt(f)
366
(a)
Represents wholesale settlements due from GMAC, amounts owed by
GMAC with respect to the operating lease assets transferred to
GM, and the exclusivity fee and royalty arrangement as discussed
above.
(b)
Represents primarily distributions due from GMAC on GM’s
Preferred Membership Interests.
(c)
Represents amounts accrued with respect to interest rate
support, capitalized cost reduction, residual support and lease
pull-ahead programs and well as the risk sharing arrangement.
(d)
Represents wholesale financing, sales of receivable transactions
and the short term portion of term loans provided to certain
dealerships wholly-owned by GM or in which GM has an equity
interest. In addition, it includes borrowing arrangements with
Adam Opel and arrangements related to GMAC’s funding of GM
company-owned vehicles, rental car vehicles awaiting sale at
auction, and funding of the sale of GM vehicles in which GM
retains title while the vehicles are consigned to GMAC or
dealers in the United Kingdom. The financing to GM remains
outstanding until the title is transferred to the dealers. Also
included is the short-term portion of a note provided to a
wholly-owned subsidiary of GM holding debt related to the
operating leases transferred to GM and a note related to the
overpayment of approximately $317 million of income taxes
by GMAC. These taxes were paid by GMAC to GM and are expected to
be refunded to GMAC on or before December 15, 2007.
(e)
Represents mainly interest accrued on the transactions in
(d) above.
(f)
Represents primarily the long-term portion of term loans and a
note payable with respect to the operating leases transferred to
GM discussed in (d) above.
Automotive interest income and
other non-operating income(b)
105
212
Derivatives(c)
(6
)
(1
)
Interest expense(d)
73
153
Servicing expense(e)
45
95
(a)
Represents primarily the sale of vehicles to a subsidiary of
GMAC for a GM employee lease program.
(b)
Represents income on GM’s Preferred Membership Interest in
GMAC, exclusivity and royalty fee income, as well as
reimbursements by GMAC for certain services provided by GM.
Included in this amount is rental income related to GMAC’s
primary executive and administrative offices located in the
Renaissance Center in Detroit, Michigan. The lease agreement
expires on November 30, 2016.
(c)
Represents gains recognized in connection with a derivative
transaction entered into with GMAC as the counterparty.
(d)
Represents interest incurred on term loans, notes payable and
wholesale settlements.
(e)
Represents servicing fees paid to GMAC on the automotive leases
retained by GM.
Note 18.
Subsequent
Events
Antwerp
Plant Workforce Reduction
On July 1, 2007, GM and the European hourly workers union
agreed upon the terms of the employee separation program for the
Antwerp, Belgium facility, which primarily consists of personnel
reductions of 1,861 employees (180 salaried) with permanent
contracts.
It is expected that this program will consist primarily of two
voluntary separation programs. The first program will be an
early retirement package for employees over the age of 50. The
second is a buy-out program for employees not over the age of 50
and therefore not eligible for early retirement. If these
programs do not reach the targeted reduction of 1,861 full time
employees then the parties will enter into negotiations to
implement an involuntary program designed to reach the target
reductions. The total cost of these separations is estimated at
$300 million. The charge for the separation programs will
depend on the timing of employee acceptances. Management expects
the charge to be primarily recorded in the third and fourth
quarters of 2007.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
General Motors Corporation (GM) is primarily engaged in the
worldwide development, production, and marketing of automobiles,
consisting of cars and trucks. GM develops, manufactures, and
markets vehicles worldwide through four automotive regions: GM
North America (GMNA), GM Europe (GME), GM Latin
America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP)
(collectively the Automotive business). Also, GM’s finance
and insurance operations are primarily conducted through GMAC,
the successor to General Motors Acceptance Corporation, a
wholly-owned subsidiary until the end of November 2006 when GM
sold a 51% controlling ownership interest in GMAC to a
consortium of investors (the GMAC Transaction). Since the GMAC
Transaction, GM has accounted for its 49% ownership interest in
GMAC using the equity method. GMAC provides a broad range of
financial services, including consumer vehicle financing,
automotive dealership and other commercial financing,
residential mortgage services, automobile service contracts,
personal automobile insurance coverage and selected commercial
insurance coverage.
From time to time, GM discusses issues of shared interest such
as possible transactions with other parties, including other
vehicle manufacturers. Frequently these proposals do not come to
fruition. We do not confirm or comment on any potential
transactions or other matters unless, and until, we determine
that disclosure is appropriate.
On June 28, 2007, GM entered into a definitive agreement
pursuant to which GM will sell the commercial and military
operations of our Allison Transmission (Allison) business for a
purchase price of approximately $5.6 billion in cash plus
assumed liabilities. The purchase price is subject to adjustment
based on the amount of Allison’s (1) net working
capital and (2) debt on the closing date. Based on these
amounts, a payment may be due from either party within
approximately thirty-five days after the closing date. Any such
payment will be an adjustment to the amount of gain recognized
on the transaction. Allison, a division of GM’s Powertrain
Operations, is a global leader in the design and manufacture of
commercial and military automatic transmissions and a premier
global provider of commercial vehicle automatic transmissions
for on-highway, including trucks, specialty vehicles, buses and
recreational vehicles, off-highway and military vehicles, as
well as hybrid propulsion systems for transit buses. GM
Powertrain Operations Baltimore facility, which manufactures
automatic transmissions primarily for GM trucks and hybrid
propulsion system, will be retained by GM. GM expects to
recognize a gain on the sale of Allison in the range of
$5.1 billion to $5.4 billion. GM expects to close the
sale of Allison in the third quarter of 2007, subject to
regulatory approval. The results of operations and cash flows of
Allison have been reported in the Condensed Consolidated
Financial Statements as discontinued operations for all periods
presented.
Financial
Results
Consolidated net sales and revenue was $46.8 billion during
the three months ended June 30, 2007 as compared to
$53.9 billion during the three months ended June 30,2006. Consolidated net income was $1 billion for the three
months ended June 30, 2007, an increase of
$4.3 billion from the three months ended June 30,2006. For the six months ended June 30, 2007, GM’s
consolidated net sales and revenues were $90.1 billion, a
decrease of $15.6 billion, or 14.7% below the
$105.7 billion for the six months ended June 30, 2006.
Since the sale of a 51% controlling interest in GMAC on
November 30, 2006, GM began accounting for its remaining
interest in GMAC using the equity method. Therefore, GM’s
consolidated results reflect its 49% share of the operating
results of GMAC on an equity basis for the three and six months
ended June 30, 2007 as compared to the operating results of
GMAC on a consolidated basis for the comparable periods in 2006.
A discussion of our regional automotive operating results and
FIO financial review follows.
As GM previously described in more detail in its Annual Report
on
Form 10-K
for the year ended December 31, 2006 (2006
Form 10-K),
our top priorities continue to be improving our business in
North America and achieving global competitiveness in an
increasingly global environment, thus positioning GM for
sustained profitability and growth in the long term, while at
the same time maintaining strong liquidity.
Our growth and profitability priorities for 2007 are
straightforward:
Continue to execute the North America turnaround
plan. Our first priority in 2007 is improving our
earnings and cash flow, particularly in GMNA, the traditional
core of our operations and financial results. Our turnaround
plan for GMNA is built on four elements: achieve and sustain
product excellence; revitalize our sales and marketing strategy;
accelerate cost reductions and quality improvements; and address
the health care/legacy cost burden. Our primary revenue related
goals for 2007 include improving our contribution margin in
North America by selling a more profitable vehicle product mix
which we are pursuing by emphasizing the quality and value of
our vehicles, reducing reliance on sales incentives and
increasing our marketing efforts on our newly launched products.
Our primary cost related goals for 2007 in North America remain
addressing our legacy cost burden and reducing our structural
costs. We are on track to achieve, beginning in 2007, our
announced target of reducing our annual structural costs in GMNA
and Corporate and Other by $9 billion, on average, less
than those costs in 2005. We remain focused on repositioning our
business for long-term competitiveness, including achieving a
successful resolution to the issues related to the bankruptcy
proceedings of Delphi Corporation (Delphi), a major supplier and
former subsidiary, and a new collective bargaining agreement
with the International Union, United Auto, Aerospace and
Agricultural Implement Workers of America (UAW) in 2007 that
benefits both GM and its hourly employees.
Grow Aggressively in Emerging Markets. Our second
key priority is to focus on emerging markets and capitalize on
the growth in areas such as China, India, and the Southeast
Asian region, as well as Russia, Brazil, the Middle East, and
the Andean region. Vehicle sales and revenues continue to grow
globally, with the strongest growth in these emerging markets.
In response, we are planning to expand capacity in China,
Russia, and India, and to pursue additional growth opportunities
through our relationships with Shanghai General Motors Co., Ltd.
and GM Daewoo Auto & Technology Company (GM Daewoo).
During the six months ended June 30, 2007, key metrics such
as net margin, operating income, and market share show continued
growth across key markets.
Continue to Drive the Benefits of Managing the Business
Globally. Our third key priority is to continue to
integrate our operations around the world to manage our business
on a global basis. GM has been focusing on restructuring its
operations and has already taken a number of steps to globalize
our principal business functions such as product development,
manufacturing, powertrain, and purchasing, to improve our
performance in an ever-more competitive environment.
Continue to Develop and Implement GM’s Advanced
Propulsion Strategy. Our fourth key priority is to
continue to develop and advance our alternative propulsion
strategy, focused on fuel and other technologies, making energy
diversity and environmental leadership a critical element of our
ongoing strategy. In addition to continuing to improve the
efficiency of our internal combustion engines, we are focused on
the introduction of propulsion technologies which utilize
alternative fuels and have intensified our efforts to displace
traditional petroleum-based fuels. In June 2007, we announced
two contracts for advanced lithium-ion battery development to
support the development of the electrically powered Chevy Volt
as a production vehicle.
Improve Business Results — Earnings and Cash
Flow. We anticipate improved automotive earnings and
cash flow in 2007, resulting from further cost reductions and
increased vehicle sales, particularly of newly introduced
models. In addition to our other priorities outlined above, we
are focused on the continued improvement of our balance sheet
and liquidity position. On June 28, 2007, we announced that
we have agreed to sell the commercial and military business of
our Allison Transmission division for $5.6 billion in cash
plus assumed liabilities. We anticipate that this sale will
close during the third quarter of 2007, subject to regulatory
approval.
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) gives effect to
the restatement discussed in Note 15 to the Condensed
Consolidated Financial Statements and should be read in
conjunction with GM’s 2006
Form 10-K.
Additionally, the Condensed Consolidated Financial Statements
have been further adjusted as GM has entered into a definitive
agreement to sell the commercial and military operations of our
Allison Transmission business. The operations of Allison have
been accounted for as discontinued operations for the three and
six months ended June 30, 2006. For additional
information, relating to the sale of Allison, refer to
Note 3.
GM operates in two businesses, consisting of Automotive (GM Auto
or GMA) and Financing and Insurance Operations (FIO).
GM’s Auto business consists of GMNA, GME, GMLAAM, GMAP, and
intra-segment eliminations classified within Auto Eliminations
which together constitute GM Automotive (GMA).
GM’s FIO business consists of the operating results of GMAC
for the three and six months ended June 30, 2006 on a
consolidated basis and includes GM’s 49% share of
GMAC’s operating results for the three and six months ended
June 30, 2007 on an equity method basis. FIO also includes
Other Financing which for the three and six months ended
June 30, 2006 includes financing entities that were not
consolidated by GMAC and for the three and six months ended
June 30, 2007, includes certain assets with respect to
automotive leases previously owned by GMAC and its affiliates
having a net book value of approximately $3.6 billion at
June 30, 2007.
Consistent with industry practice, our market share information
includes estimates of sales in certain countries where public
reporting is not legally required or otherwise available on a
consistent basis.
Income (loss) from continuing
operations before income taxes, other equity income and minority
interests
451
(5,368
)
294
(4,789
)
Income tax benefit
(320
)
(1,715
)
(381
)
(1,546
)
Equity income and minority
interests, net of tax
13
159
67
242
Income (loss) from continuing
operations
784
(3,494
)
742
(3,001
)
Income from discontinued
operations, net of tax
107
111
211
220
Net income (loss)
$
891
$
(3,383
)
$
953
$
(2,781
)
Net margin from continuing
operations
1.7
%
(6.5
)%
.8
%
(2.8
)%
GM’s consolidated net sales and revenue was
$46.8 billion in the second quarter of 2007 compared to
$53.9 billion in the second quarter of 2006. GM’s
consolidated income from continuing operations was
$784 million for the second quarter of 2007, an increase of
$4.3 billion from the second quarter of 2006. The reduction
in revenue was primarily due to GM’s sale of a 51%
controlling ownership interest in GMAC in November of 2006.
Since then, GM has accounted for its 49% ownership interest in
GMAC using the equity method. Therefore, GM’s consolidated
results reflect its 49% share of the operating results of GMAC
on an equity basis in the second quarter of 2007, as compared to
the operating results of GMAC on a consolidated basis for the
comparable period of 2006. Revenue and net income related to
GMAC’s operations included in GM’s consolidated
results in the second quarter of 2006 were $9 billion and
$788 million, respectively. The increase in income from
continuing operations was primarily due to improved automotive
results. Further information on each of GM’s businesses and
geographic regions are discussed below.
GM’s consolidated net sales and revenue for six months was
$90.1 billion and $105.7 billion for 2007 and 2006,
respectively. GM’s consolidated income from continuing
operations was $742 million for the six months ended
June 30, 2007, and a loss of $3 billion for the
corresponding period in 2006. The reduction in revenue was
primarily due to GM’s sale of a 51% controlling ownership
interest in GMAC in November of 2006. The improved income from
continuing operations was driven by higher automotive earnings.
Accounts and notes receivable at June 30, 2007 was
$10.2 billion as compared to $8.2 billion at
December 31, 2006, an increase of $2.0 billion or
24.5%. This increase is primarily due to the lower receivable
balance at GMNA of $1.3 billion on December 31, 2006
as a result of the seasonal plant shutdowns during the holiday
season that significantly reduce shipments during the last
2 weeks of the period while we continue to collect existing
receivables. GME and GMLAAM contributed an additional
$200 million and $125 million to the increased
receivables balance due to increased unit sales. GMAP’s
receivables balance increased $148 million, primarily due
to increased dividends receivable from its nonconsolidated
affiliate, Shanghai General Motors Co., Ltd.
Inventories
Inventories at June 30, 2007 were $15.1 billion as
compared to $13.9 billion at December 31, 2006, an
increase of $1.2 billion or 8.3%. The increase in inventory
at June 30, 2007 is primarily due to a $900 million
increase in finished product at GME, driven by a 43,000 vehicle
inventory increase together with mix and currency effects,
Additionally, GMAP and GMLAAM’s inventory balances have
each increased approximately $350 million to support sales
forecasts for the rest of the year. GMNA has also increased its
raw materials balance by $300 million to support future
production. These increases in the inventory balance have been
offset by a reduction of daily rental purchases at GMNA of
$450 million.
Financing
equipment on operating leases, net
Equipment on operating leases, net at June 30, 2007 was
$9.1 billion as compared to $11.8 billion at
December 31, 2006, a decrease of $2.7 billion or
22.5%. The decrease is due to the termination of vehicle leases
that are not being replaced.
Automotive
accounts payable (principally trade)
Automotive accounts payable at June 30, 2007 was
$30.7 billion as compared to $26.9 billion at
December 31, 2006, an increase of $3.8 billion or
14.2%. The increase of $3.8 billion in accounts payable is
primarily due to normal resumption in production as compared to
production volumes during the year end shut down period. The
increase in automotive payables related to volume increases at
each of the regions is approximately, GMNA, $1.8 billion,
GME, $400 million, GMLAAM, $200 million, and GMAP,
$700 million. During the shut down period purchasing is
significantly reduced while GM continues to pay suppliers on
their normal payment terms.
Financing
debt
Financing debt at June 30, 2007 was $7.1 billion as
compared to $9.4 billion at December 31, 2006, a
decrease of $2.3 billion or 24.4%. The decrease in debt is
primarily due to the repayment of the secured debt associated
with the bankruptcy-remote subsidiaries that hold the equity
interests in a number of trusts that own leased vehicles.
Financing
other liabilities and deferred income taxes
Financing other liabilities and deferred income taxes at
June 30, 2007 was $855 million as compared to
$2.1 billion at December 31, 2006, a decrease of
$1.2 billion or 60%. The decrease is primarily related to a
$1 billion payment to GMAC for amounts owed under the GMAC
sales agreement to restore their tangible equity balance to
$14.4 billion.
Income (loss) before income taxes,
other equity income and minority interests
790
(5,667
)
922
(5,283
)
Income tax expense (benefit)
185
(2,028
)
235
(1,760
)
Equity income and minority
interests, net of tax
13
164
67
234
Income (loss) from continuing
operations
618
(3,475
)
754
(3,289
)
Income from discontinued operations
107
111
211
220
Net income (loss)
$
725
$
(3,364
)
$
965
$
(3,069
)
Net margin from continuing
operations
1.3
%
(7.7
)%
.9
%
(3.7
)%
(Volume in thousands)
GM production volume(1)
2,409
2,420
4,749
4,835
Vehicle unit sales(2)
Industry
18,125
17,438
35,548
34,293
GM
2,406
2,396
4,674
4,595
GM as a% of industry
13.3
%
13.7
%
13.1
%
13.4
%
(1)
Production volume represents the number of vehicles manufactured
from GM’s assembly facilities, and also includes vehicles
produced by joint ventures.
(2)
Vehicle unit sales primarily represent sales to the ultimate
customer.
GM’s management evaluates its Automotive business and makes
certain decisions using supplemental categories for variable
expenses and non-variable expenses. GM believes that because
these categories provide them with useful information, investors
would find it beneficial to have the opportunity to view the
business in a similar manner.
Management believes that contribution costs, structural costs,
and impairment and restructuring charges provide meaningful
supplemental information regarding our expenses because they
place Automotive expenses into categories that allow GM
management to assess the cost performance of GMA. GM management
uses these categories to evaluate GM’s expenses and
believes these categories allow GM management to readily view
operating trends, perform analytical comparisons, benchmark
expenses among geographic regions, and assess whether the
turnaround and globalization strategy for cutting costs are on
target. GM management uses these categories for forecasting
purposes, evaluating management, and determining its future
capital investment allocations. Accordingly, GM believes these
categories are useful to investors in allowing for greater
transparency of supplemental information used by management in
its financial and operational decision-making.
While GM believes that contribution costs, structural costs, and
impairment and restructuring charges provide useful information,
there are limitations associated with the use of these
categories. Contribution costs, structural costs, and impairment
and restructuring charges may not be completely comparable to
similarly titled measures of other companies due to potential
differences in the exact method of calculation between
companies. As a result,
these categories have limitations and should not be considered
in isolation from, or as a substitute for, other measures such
as Automotive cost of sales and Selling, general, and
administrative expense. GM compensates for these limitations by
using these categories as supplements to Automotive cost of
sales and Selling, general, and administrative expense.
Contribution costs are expenses that vary with production. The
amount of contribution costs included in Automotive cost of
sales is $31.7 billion and $31 billion in the second
quarters of 2007 and 2006, respectively. These costs primarily
consist of material costs, freight, and policy and warranty
expenses. The amount of contribution costs classified in
Selling, general and administrative expense is $.3 billion
in the second quarters of both 2007 and 2006, which were
incurred primarily in connection with our dealer advertising
programs. The amount of contribution costs included in
Automotive cost of sales is $60.7 billion and
$60.2 billion in the first six months of 2007 and 2006,
respectively. For the six months ended June 30, 2007 and
2006, $.5 billion and $.6 billion, respectively of
contribution costs, primarily related to advertising, were
included in Selling, general and administrative expense.
(b)
Structural costs are expenses that do not generally vary in
direct proportion with production and are recorded in both
Automotive cost of sales and Selling, general, and
administrative expense. Such costs include manufacturing labor,
pension and OPEB costs, engineering expense, and marketing
related costs. Certain costs related to restructuring and
impairments that are included in Automotive cost of sales are
also excluded from structural costs. The amount of structural
costs included in Automotive cost of sales was $9.7 billion
and $10.1 billion in the second quarter of 2007 and 2006,
respectively, and the amount of structural costs included in
Selling, general, and administrative expense is approximately
$2.9 billion in 2007 and $2.7 billion in 2006. The
amount of structural costs included in Automotive cost of sales
was $19.3 billion and $20.2 billion in the first six
months of 2007 and 2006, respectively, and the amount of
structural costs included in Selling, general, and
administrative expense is approximately $5.8 billion and
$5.6 billion in the same respective periods.
(c)
The amount of impairment and restructuring charges included in
Automotive cost of sales was $.2 billion and
$6.2 billion in the second quarters of 2007 and 2006,
respectively, and $.3 billion and $6.4 billion for the
six months ended June 30, 2007 and 2006, respectively. See
below for further discussion.
Industry
Global Vehicle Sales
Worldwide industry vehicle unit sales increased
700,000 units during the three months ended June 30,2007, to 18.1 million units, compared to 17.4 million
units during the three months ended June 30, 2006. Industry
sales decreased in North America by 94,000 units, to
5.3 million units during the three months ended
June 30, 2007, compared to 5.4 million units during
the three months ended June 30, 2006. All other regions
experienced growth in industry unit volume compared to 2006,
particularly the Asia Pacific region, up more than
400,000 units to 5.1 million units in 2007, and the
Latin America/Africa/Mid-East region, up nearly
300,000 units to 1.7 million units in 2007.
For the six months ended June 30, 2007, worldwide industry
vehicle unit sales increased over 1.3 million units to
35.5 million units, compared to 34.3 million units
during the six months ended June 30, 2006. Industry sales
decreased in North America 161,000 units, to
10 million units during the six months ended June 30,2007. All other regions experienced growth in industry unit
volume compared to 2006, with the Asia Pacific region up more
than
700,000 units, the Latin America/Africa/Mid-East region up
more than 450,000 units, and Europe up more than
200,000 units in 2007.
GM
Global Vehicle Sales
Worldwide GM vehicle unit sales were 2.4 million units, an
increase of 10,000 units compared to the three months ended
June 30, 2006. GME, GMLAAM, and GMAP all reported sales
unit increases, while a sales decline was reported in GMNA.
Global market share for GM was 13.3% compared to 13.7% during
the three months ended June 30, 2006. Market share declines
occurred in GMNA due to planned reductions in sales to rental
car fleet customers, a soft U.S. market, and loss of truck
sales as the market shifted to more cars. This decline was
partially offset by market share gains in GME and GMLAAM.
For the six months ended June 30, 2007, worldwide GM
vehicle unit sales increased 78,000 units, to
4.7 million units, compared to 4.6 million units for
the six months ended June 30, 2006. Increases at GME,
GMLAAM, and GMAP more than offset a sales decline in GMNA. For
the first half of 2007, global market share for GM was 13.1%
compared to 13.4% for the six months ended June 30, 2006.
As in the second quarter of 2007, market share declines in GMNA
were partially offset by market share gains in GME, GMLAAM and
GMAP.
GM global production volume for the three months ended
June 30, 2007 was 2.4 million units, a decrease of
11,000 units from the three months ended June 30,2006. This was due to decreases at GMNA and GME of
96,000 units and 31,000 units, respectively, which
were partially offset by production increases at GMLAAM and GMAP
of 27,000 and 89,000 units, respectively.
For the six months ended June 30, 2007, GM’s global
production volume for was 4.7 million units, a decrease of
86,000 units from the year earlier period. A decrease at
GMNA of 288,000 units and a slight decline in GME were
partially offset by production increases at GMLAAM and GMAP.
Automotive
Net Sales and Revenue
GM automotive net sales and revenue was a quarterly record of
$45.9 billion in the second quarter of 2007, an increase of
$1 billion from the comparable prior period. Revenue
improvements at GME, GMLAAM and GMAP offset a revenue decline at
GMNA. Net pricing was also positive at GMNA and GME and the weak
U.S. dollar against most foreign currencies had a favorable
impact on global revenue.
Total net sales and revenue for GMA was $88.3 billion for
the six months ended June 30, 2007, an increase of
$.3 billion from the comparable period of 2006. This
increase was driven by a significant revenue increase in GMAP,
with increases also in GME and GMLAAM, mostly offset by a
decrease in revenue in GMNA.
Contribution
Costs
Contribution costs in the second quarter of 2007 were
$32.0 billion, an increase of $.7 billion from the
comparable period of 2006. Higher prices for steel and
non-ferrous metals resulted in an increase of $.3 billion
in material costs from the prior period. A weak U.S. dollar
against most foreign currencies also contributed
$.6 billion to higher contribution costs. Policy and
warranty and vehicle recall campaign expense increased in the
second quarter of 2007 by $.6 billion primarily due to an
adjustment made in the second quarter of 2006 to pre-existing
warranties, and costs associated with the GMNA extended warranty
program announced in the third quarter of 2006. Contribution
costs decreased by $.8 billion as a result of lower global
sales volumes including the effect of mix associated with new
vehicle launches and lower volumes at GMNA.
Contribution costs for the first six months of 2007 were
$61.2 billion, an increase of $.4 billion over the
first six months of 2006. Cost increases relating to vehicle
content, the weak U.S. dollar, price increases for
non-ferrous metals and steel, and policy, warranty and campaign
expense drove the cost increase, which was partially offset by
lower contribution costs in the six months ended June 30,2007 due to reduced unit sales volume at GMNA and GME.
Structural
Costs
Automotive structural costs were $12.6 billion in the
second quarter of 2007, a reduction of $.2 billion from the
second quarter of 2006. Contributing to this reduction were
savings on retiree pension/OPEB of $.8 billion, primarily
due to GM’s UAW Health Care Settlement Agreement, as well
as manufacturing savings of approximately $.3 billion from
lower hourly headcount levels driven by the UAW Attrition
Program. Global product engineering and development expense was
higher by $.4 billion in the second quarter of 2007,
reflecting increased global vehicle development spending.
Structural costs were higher by $.5 billion in the second
quarter of 2007 compared to 2006 due to the impact of the weak
U.S. dollar and higher spending related to production and
sales volume increases at GMLAAM and GMAP.
Automotive structural costs for the six months ending
June 30, 2007 were $25.1 billion, a reduction of
$.7 billion from same period in 2006. Expenses in the six
months ended June 30, 2007 were lower by $2.6 billion
in GMNA, resulting from reduced OPEB, pension, and manufacturing
costs relating to the UAW health care settlement and UAW
attrition program. The increase in costs related to the weak
U.S. dollar offset a portion of the savings in GMNA. Global
engineering costs increased consistent with the strategy to
support global vehicle program development, and certain costs
increased in line with volume expansion, particularly in GMLAAM
and GMAP.
Impairment
and Restructuring Charges
GM incurred certain expenses primarily related to restructuring
initiatives and asset impairments, which are included in
Automotive cost of sales. Such costs totaled $.2 billion
and $6.2 billion for the quarters ended June 30, 2007
and 2006, respectively.
The amounts for the three months ended June 30, 2007 were
primarily related to the following:
•
$97 million charge for capacity initiatives at GMNA and
$30 million restructuring charge at GME.
•
$95 million charge for product specific asset impairments
at GMNA.
The amounts for the three months ended June 30, 2006 were
primarily related to the following:
•
$6.5 billion for a charge related to the program under the
UAW Attrition Agreement (UAW Attrition Program), primarily for
payments to employees ($2.1 billion) and for the
curtailment charges associated with GM’s U.S. hourly
pension, OPEB, and extended disability plans as a result of the
UAW Attrition Program ($4.4 billion).
Impairment
and Restructuring
Charges — (concluded)
•
Other restructuring charges recognized at GME and GMLAAM of
$214 million and $16 million, respectively. A
favorable revision to the reserve recorded in the fourth quarter
of 2005 related to North American plant capacity actions
($.9 billion), primarily attributable to the impact of the
UAW Attrition Program.
•
$303 million charge at GMNA and a $60 million charge
at GME, related to the write down of product specific assets.
The amounts for the six months ended June 30, 2007 were
primarily related to the following, in addition to the items
above:
•
$95 million for restructuring initiatives at GME
($57 million) and GMAP ($48 million).
The amounts related to restructuring initiatives for the six
months ended June 30, 2006 were primarily related to the
following, in addition to the items above:
•
$64 million at GMNA, consisting of a charge of
$100 million related to a salaried severance program, a
charge of $81 million for certain components of the
U.S. hourly attrition program related to lump sum benefit
payments, and curtailment charges of $19 million related to
modifications in GM’s pension plans for U.S. salaried
employees. These were partially offset by a favorable adjustment
of $136 million related to the reserve for postemployment
benefits, primarily due to higher than anticipated headcount
reductions associated with GMNA plant idling activities.
•
Other restructuring charges recognized at GME and GMLAAM of
$47 million and $27 million, respectively.
Automotive
Cost of Sales
Automotive cost of sales was $41.7 billion in the second
quarter of 2007, $5.6 billion below the same period in
2006. Automotive cost of sales was 90.7% and 105.4% of total net
sales and revenues for the three months ended June 30, 2007
and 2006, respectively. The decrease in 2007 was primarily
driven by GMNA where a $6.5 billion charge was taken in the
second quarter of 2006 relating to the Attrition Program,
primarily for payments to employees ($2.1 billion) and for
the curtailment charges associated with GM’s
U.S. hourly pension, OPEB, and extended disability plans as
a result of the Attrition Program ($4.4 billion). This was
partially offset by an increase in cost of sales in GMAP, GME
and GMLAAM, driven by higher sales volume. (Further details are
described in the regional analyses.)
Automotive cost of sales was $80.3 billion for the first
six months of 2007, $6.5 billion lower than the same period
in 2006. Cost of sales was 91% and 98.8% of Total net sales and
revenues for the six months ended June 30, 2007 and 2006,
respectively.
Selling,
General, and Administrative Expense
Selling, general, and administrative expenses were
$3.1 billion and $3 billion in the second quarters of
2007 and 2006, respectively. Spending was lower in the second
quarter of 2007 at GMNA primarily related to product liability
insurance, offset by increases at GME, GMLAAM and GMAP due to
the impact of foreign exchange and spending to support volume
growth. (Further details are described in the regional analyses.)
Spending was $6.3 billion in the first six months of 2007
compared to $6.2 billion in 2006 due to increased spending
at GME, GMLAAM and GMAP.
Automotive
Interest and Other Income (Expense)
Automotive interest and other income (expense) was
($.3) billion during the second quarter of 2007 as compared
to ($.2) billion in the second quarter of 2006, an increase
of $.1 billion. The increase in expense is
Automotive
Interest and Other Income
(Expense) — (concluded)
primarily related to a gain of $.3 billion on the sale of
the majority of GM’s investment in Isuzu Motors Limited
(Isuzu) in the second quarter of 2006, partially offset by
favorable net interest of $.2 billion in 2007.
For the first six months of 2007, Automotive interest and other
income (expense) was ($.8) billion, compared to
($.2) billion in 2006. The increase in expense in 2007 is
primarily attributable to a gain of $.6 billion on the sale
of the majority of GM’s investment in Suzuki Motor
Corporation (Suzuki) in the first quarter of 2006.
Income
Tax Expense
Income tax expense was $.2 billion during the second
quarter of 2007, compared to a benefit of $2 billion the
second quarter of 2006.
For the six months ended June 30, 2007, tax expense was
$.2 billion, compared to a benefit of $1.8 billion in
2006. The increase in both the three and six month periods of
2007 is primarily attributable to increased pretax income,
primarily at GMNA.
Equity
Income and Minority Interests, Net of Tax
Equity income and minority interests was $13 million during
the second quarter of 2007, compared to $164 million in the
second quarter of 2006, a decrease of $151 million. For the
first six months ended June 30, 2007 the decrease was
$167 million, to $67 million in 2007. The decrease in
2007 was primarily due to the increase of minority interest due
to the growth in income at GM-Daewoo in 2007, as well as the
loss of equity income related to the sale of the majority of
GM’s investment in Suzuki in the first quarter of 2006.
Income
from Discontinued Operations
On June 28, 2007 GM announced an agreement to sell the
commercial and military business of our Allison Transmission
division. Accordingly, income, net of tax, from this operation
has been reclassified as income from discontinued operations for
all periods presented. Income was $107 million and
$111 million for the three months ended June 30, 2007
and 2006, respectively, and $211 million and
$220 million for the six months ended June 30, 2007
and 2006, respectively.
Loss before income taxes, other
equity income and minority interests
(98
)
(6,172
)
(309
)
(6,653
)
Income tax benefit
(49
)
(2,151
)
(75
)
(2,225
)
Equity income and minority
interests, net of tax
10
71
13
77
Net loss from continuing operations
(39
)
(3,950
)
(221
)
(4,351
)
Income from discontinued
operations, net of tax
107
111
211
220
Net income (loss)
$
68
$
(3,839
)
$
(10
)
$
(4,131
)
Net margin from continuing
operations
(0.1
)%
(12.8
)%
(.4
)%
(7.1
)%
(Volume in thousands)
Production volume(1) Cars
401
462
800
958
Trucks
740
775
1,404
1,534
Total
1,141
1,237
2,204
2,492
Vehicle Unit
Sales(2) Industry — North America
5,305
5,399
10,000
10,162
GM
1,200
1,290
2,256
2,413
GM as% of industry
22.6
%
23.9
%
22.6
%
23.7
%
Industry — U.S.
4,442
4,572
8,430
8,626
GM as a percentage of industry
22.8
%
24.1
%
22.8
%
24.0
%
GM cars
19.2
%
20.0
%
19.2
%
20.3
%
GM trucks
26.2
%
27.9
%
26.0
%
27.1
%
(1)
Production volume represents the number of vehicles manufactured
from GM’s assembly facilities, and also includes vehicles
produced by joint ventures.
(2)
Vehicle unit sales primarily represent sales to the ultimate
customer.
GMNA reported net loss from continuing operations of
$39 million for the three months ended June 30, 2007,
an improvement of $3.9 billion over the net loss from
continuing operations of $4 billion reported for the
comparable period in 2006. For the six month period ending
June 30, 2007, GMNA reported net loss from continuing
operations of $221 million, as compared to net loss from
continuing operations of $4.4 billion in the comparable
period in 2006, an improvement of $4.1 billion.
Total
Net Sales and Revenue
Regional industry vehicle unit sales in North America were
5.3 million units during the three months ended
June 30, 2007 as compared to 5.4 million units in the
three months ended June 30, 2006, a decrease of
94,000 units, or 1.7% due to weakness in the economy
resulting from a decline in the housing market and rising and
volatile gas prices. GMNA vehicle unit sales for the three
months ended June 30, 2007 were 1.2 million units as
compared to
1.3 million units for the three months ended June 30,2006, a decrease of 90,000 units, or 7.0% due to lower
reliance on the less profitable sales to daily rental car
companies and loss of retail market share as demand shifts from
trucks, where GMNA has strong market share, to cars where
GMNA’s market share is lower. The change in vehicle unit
sales volumes has decreased GMNA market share to 22.6% during
the three months ended June 30, 2007 as compared to 23.9%
during the three months ended June 30, 2006, a decrease of
1.3 percentage points.
Regional industry vehicle unit sales in North America were
10 million units during the six months ended June 30,2007 as compared to 10.2 million units in the six months
ended June 30, 2006, a decrease of 162,000 units, or
1.6% due to weakness in the economy resulting from a decline in
the housing market and rising and volatile gas prices. GMNA
vehicle unit sales for the six months ended June 30, 2007
were 2.3 million units as compared to 2.4 million
units for the six months ended June 30, 2006, a decrease of
157,000 units, or 6.5% due to lower reliance on the less
profitable sales to daily rental car companies and loss of
market share as demand shifts from trucks, where GMNA has strong
market share, to cars where GMNA’s market share is lower.
The change in vehicle unit sales volumes decreased GMNA market
share to 22.6% during the six months ended June 30, 2007 as
compared to 23.7% during the six months ended June 30,2006, a decrease of 1.1 percentage points.
Net sales and revenue were $29.6 billion during the three
months ended June 30, 2007 as compared to
$30.9 billion during the three months ended June 30,2006, a decrease of $1.3 billion, or 4.1%. The decrease in
revenue was due to a decline in volumes, which was partially
offset by favorable content mix on those units sold, primarily
on the recently launched full size
pick-ups.
Net sales and revenue were $57.5 billion during the six
months ended June 30, 2007 as compared to
$61.2 billion during the six months ended June 30,2006, a decrease of $3.7 billion, or 5.9%. The decrease in
revenue was due to a decline in volumes, which was partially
offset by favorable mix of vehicles sold as well as favorable
content on those units sold, primarily on the recently launched
full size
pick-ups.
Automotive
Cost of Sales
Automotive cost of sales was $27.5 billion during the three
months ended June 30, 2007 as compared to
$34.5 billion during the three months ended June 30,2006, a decrease of $7 billion or 20.5%. The decrease in
Automotive cost of sales was primarily due to higher
restructuring and impairment charges taken in the second quarter
of 2006 than in 2007: these include charges of $6.5 billion
related to the UAW Special Attrition Program in 2006; vehicle
line impairment charges of $.3 billion recorded in the
second quarter of 2006 as compared to $.1 billion recorded
in 2007; and net decreases of $.9 billion in 2006 compared
to increases in closed plants liabilities of $.1 billion in
2007. In the second quarter of 2007, lower production volumes
partially offset by production of higher costing vehicles
accounted for an additional net favorable impact of
$1.6 billion. Also contributing favorably were savings on
retiree pension/OPEB of $.8 billion, primarily due to
GM’s UAW Health Care Settlement Agreement, as well as
manufacturing savings of approximately $.3 billion from
lower hourly headcount levels driven by the UAW Attrition
Program. Partially offsetting these favorable variances were
higher material costs ($.3 billion), and higher warranty
related costs, primarily related to favorable reserve
adjustments made in the second quarter of 2006
($.7 billion). Automotive cost of sales as a percentage of
net sales and revenues was 92.8% during the three months ended
June 30, 2007 as compared to 112% during the three months
ended June 30, 2006.
Automotive cost of sales was $53.2 billion during the six
months ended June 30, 2007 as compared to
$62.8 billion during the six months ended June 30,2006, a decrease of $9.6 billion or 15.2%. The decrease in
Automotive cost of sales was primarily due to $5.9 billion
higher restructuring and impairment charges taken in the first
six months of 2006 compared to the same period in 2007: UAW
Attrition Program expenses of $6.5 billion in the second
quarter of 2006, impairment charges of $.3 billion in the
second quarter of 2006, and net reductions in the closed plant
liabilities totaling $.9 billion in the second quarter of
2006. These compare to charges in 2007 related to
vehicle line impairments of $.1 billion. Lower production
volumes partially offset by production of higher costing
vehicles accounted for an additional net favorable impact of
$3.2 billion. Also contributing favorably were savings on
retiree pension/OPEB of $1.6 billion, primarily due to the
UAW Health Care Settlement Agreement, as well as manufacturing
savings of $1 billion from lower hourly headcount levels
driven by the UAW Attrition Program. Partially offsetting these
favorable variances were higher material costs
($.5 billion) and higher warranty related costs
($.8 billion). Automotive cost of sales as a percentage of
net sales and revenues was 92.5% during the six months ended
June 30, 2007 as compared to 102.6% during the six months
ended June 30, 2006.
Selling,
General, and Administrative Expense
Selling, general, and administrative expense was
$1.8 billion during the three months ended June 30,2007 as compared to $2 billion during the three months
ended June 30, 2006, a decrease of $.2 billion or
10.3%. The decrease in Selling, general, and administrative
expense was due to a reduction across the board in spending, as
well as the impact of a reduction in the product liability
reserve of $.2 billion in the second quarter of 2007 as
compared to the reduction in the prior year of $.1 billion.
Selling, general, and administrative expense was
$3.8 billion during the six months ended June 30, 2007
as compared to $4.2 billion during the six months ended
June 30, 2006, a decrease of $.4 billion or 8.7%. The
decrease in Selling, general, and administrative expenses was
due to higher than normal advertising spending in the first
quarter of 2006 to promote the vehicle price repositioning
initiative, called “Total Value Promise,” which
reduced selling prices and reduced the use and amount of retail
incentives in North American operations, a reduction across the
board in spending in 2007, as well as the impact of a reduction
in the product liability reserve of $.2 billion in the
second quarter of 2007 as compared to the reduction in the prior
year of $.1 billion.
Net
Income from Discontinued Operations
During the second quarter of 2007, GM announced it had reached
an agreement to sell the commercial and military business of our
Allison Transmission division. As such, income from this
operation has been reclassified to discontinued operations for
the current period as well as prior periods.
Production volume represents the number of vehicles manufactured
from GM’s assembly facilities, and also includes vehicles
produced by joint ventures.
(2)
Vehicle unit sales primarily represent sales to the ultimate
customer.
GM Europe reported net income of $217 million for the three
months ended June 30, 2007, compared to a net loss of
$39 million for the three months ended June 30, 2006,
an increase of $256 million. For the six months ended
June 30, 2007, GM Europe reported net income of
$222 million, compared to net income of $20 million in
the six months ended June 30, 2006, an increase of
$202 million.
Regional
Industry Vehicle Unit Sales
During the three months ended June 30, 2007, regional
industry vehicle unit sales in GM Europe were 6.1 million,
compared to 5.9 million in the three months ended
June 30, 2006, an increase of 105,000 vehicles, or 1.8%.
Industry vehicle unit sales growth in the region was led by a
136,000 vehicle, or 24.8% increase in Russia, primarily in
addition to increases in Italy, Poland, the Ukraine, and various
markets in southeastern Europe. These improvements were
partially offset by a 79,000 vehicle, or 7.8% decrease in
Germany, primarily in addition to decreases in France and Turkey.
During the six months ended June 30, 2007, regional
industry vehicle unit sales in GM Europe were 11.8 million,
compared to 11.5 million in the six months ended
June 30, 2006, an increase of 239,000 vehicles, or 2.1%.
Industry vehicle unit sales growth in the region was led by a
248,000 vehicle, or 26.5% increase in Russia, primarily in
addition to increases in Italy, Poland, the Ukraine, and various
markets in southeastern Europe. These
improvements were partially offset by a 153,000 vehicle, or 8.1%
decrease in Germany, primarily in addition to decreases in
France and Turkey.
Total
Net Sales and Revenue
Net sales and revenue was $9.6 billion during the three
months ended June 30, 2007, compared to $8.7 billion
during the three months ended June 30, 2006, an increase of
$.9 billion, or 9.4%. This increase was primarily driven by
a $.6 billion increase due to the impact of foreign
exchange rates, primarily the strengthening of the Euro, British
Pound and Swedish Krona versus the U.S. Dollar, a
$.2 billion increase due to improvements in pricing
associated with the introduction of new models, primarily the
Corsa, partially offset by a $.2 billion decrease due to
lower wholesale sales volume. In line with the industry trends
noted above, the most significant decrease in wholesale volume
was experienced in Germany, where sales were down
24,000 units, or 24.2%. This impact was partially offset by
a substantial increase in Russia, where sales were up
14,000 units, or 241.1%.
Net sales and revenue was $18 billion during the six months
ended June 30, 2007, compared to $16.8 billion during
the six months ended June 30, 2006, an increase of
$1.2 billion, or 7.4%. This increase was primarily driven
by a $1.3 billion increase due to the impact of foreign
exchange rates, a $.3 billion increase due to improvements
in pricing associated with the introduction of new models,
primarily the Corsa, partially offset by a $.5 billion
decrease due to lower wholesale sales volume. In line with the
industry trends noted above, the most significant decrease in
wholesale volume was experienced in Germany, where sales were
down 39,000 units, or 21%. This impact was partially offset
by a substantial increase in Russia, where sales were up
20,000 units, or 236%. In addition, vehicle mix caused a
$.1 billion unfavorable impact, as the favorable effect of
higher Antara and Astra Twintop volume was more than offset by
the unfavorable effect of lower Zafira and higher Corsa volume.
Automotive
Cost of Sales
Automotive cost of sales was $8.5 billion in the three
months ended June 30, 2007, compared to $8.2 billion
during the three months ended June 30, 2006, an increase of
$.3 billion, or 4.5%. This increase was primarily driven by
a $.6 billion increase due to the impact of foreign
exchange rates, and a $.2 billion increase due to
unfavorable vehicle and country mix, primarily as a result of
higher freight and duties associated with vehicles imported into
Russia and from Korea, partially offset by $.2 billion
lower separation and impairment charges and a $.2 billion
decrease due to lower wholesale sales volume. Automotive cost of
sales as a percentage of net sales and revenue was 89.4% for the
three months ended June 30, 2007, compared to 93.6% for the
three months ended June 30, 2006.
Automotive cost of sales was $16.3 billion in the six
months ended June 30, 2007, compared to $15.5 billion
during the six months ended June 30, 2006, an increase of
$.8 billion, or 5.3%. This increase was primarily driven by
a $1.3 billion increase due to the impact of foreign
exchange rates, and a $.2 billion increase due to
unfavorable vehicle and country mix, primarily as a result of
higher freight and duties associated with vehicles imported into
Russia and from Korea, partially offset by $.3 billion
lower separation and impairment charges and a $.4 billion
decrease due to lower wholesale sales volume. Automotive cost of
sales as a percentage of net sales and revenue was 90.5% for the
six months ended June 30, 2007, compared to 92.3% for the
six months ended June 30, 2006.
Selling,
General, and Administrative Expense
Selling, general, and administrative expense was
$.7 billion during the three months ended June 30,2007, compared to $.6 billion during the three months ended
June 30, 2006, an increase of $.1 billion, or 14.7%.
This increase was primarily due to the impact of foreign
exchange rates.
Selling, general, and administrative expense was
$1.3 billion during the six months ended June 30,2007, compared to $1.2 billion during the six months ended
June 30, 2006, an increase of $.1 billion, or 13.6%.
This increase was primarily due to the impact of foreign
exchange rates.
Income before income taxes, other
equity income and minority interests
295
168
550
266
Income tax expense
83
28
136
85
Equity income (loss) and minority
interests, net of tax
1
(1
)
—
(2
)
Net income
$
213
$
139
$
414
$
179
Net margin
4.9
%
3.6
%
5.2
%
2.6
%
(Volume in thousands)
Production volume(1)
233
206
455
400
Vehicle Unit Sales(2)
Industry
1,723
1,462
3,345
2,897
GM
293
245
564
475
GM as% of industry
17.0
%
16.8
%
16.9
%
16.4
%
GM market share — Brazil
20.1
%
21.6
%
20.1
%
21.5
%
(1)
Production volume represents the number of vehicles manufactured
from GM’s assembly facilities, and also includes vehicles
produced by joint ventures.
(2)
Vehicle unit sales primarily represent sales to the ultimate
customer.
GMLAAM reported net income of $213 million and
$139 million for the three months ended June 30, 2007
and 2006 respectively, an increase of $74 million or 53.2%.
For the six months ended June 30, 2007 and 2006, GMLAAM
reported net income of $414 million and $179 million
respectively, an increase of $235 million or 131.3%.
Regional
Vehicle Sales
Regional industry vehicle unit sales in GMLAAM were
1.7 million units for the three months ended June 30,2007 as compared to 1.5 million units for the comparable
period in 2006, an increase of 261,000 units, or 17.9%.
Strong growth throughout the region contributed to this increase.
GMLAAM vehicle unit sales for the three months ended
June 30, 2007 were 293,000 units as compared to
245,000 units for the comparable period in 2006, an
increase of 48,000 units, or 19.6%. GMLAAM vehicle sales
growth was strong in most countries throughout the region. The
change in vehicle unit sales volumes has increased GMLAAM market
share to 17% during the three months ended June 30, 2007 as
compared to 16.8% during the three months ended June 30,2006, an increase of .2 percentage points.
Regional industry vehicle unit sales in GMLAAM were
3.3 million units during the six months ended June 30,2007 as compared to 2.9 million units in the six months
ended June 30, 2006, an increase of 448,000 units, or
15.5%. Industry vehicle sales growth in GMLAAM was strong
throughout the region.
GM
Latin America/Africa/Mid-East (LAAM)
Operations — (continued)
GMLAAM vehicle unit sales for the six months ended June 30,2007 were 564,000 units as compared to 475,000 units
for the six months ended June 30, 2006, an increase of
89,000 units, or 18.7%. GMLAAM vehicle sales growth was
strong throughout the region. The change in vehicle unit sales
volumes has increased GMLAAM market share to 16.9% during the
six months ended June 30, 2007 as compared to 16.4% during
the six months ended June 30, 2006.
Total
Net Sales and Revenue
Net sales and revenue were $4.3 billion and
$3.8 billion for the three months ended June 30, 2007
and 2006, respectively, an increase of $.5 billion or
13.1%. $.5 billion of the increase in revenue was primarily
due to increased volumes across most GMLAAM business units,
including increased revenues in Venezuela, Brazil and Colombia
offset by a decrease in the Middle East. Favorable vehicle
pricing increased revenue by $.1 billion, and favorable
foreign currency exchange primarily related to the Brazilian
Real and Columbian Peso increased revenue by $.1 billion.
These factors were offset by the unfavorable impact of the
product mix in GM’s vehicle portfolio, which reduced
revenue by $.2 billion.
Net sales and revenue were $7.9 billion and $7 billion
for the three months ended June 30, 2007 and 2006,
respectively, an increase of $.9 billion or 13.1%.
$.9 billion of the increase in revenue was primarily due to
increased volumes across most GMLAAM business units, including
increased revenues in Venezuela, Brazil and Colombia offset by a
decrease in the Middle East. Favorable vehicle pricing increased
revenue by $.2 billion, and favorable foreign currency
exchange increased revenue by $.1 billion. These factors
were partially offset by the unfavorable impact of the product
mix in GM’s vehicle portfolio, which reduced revenue by
$.3 billion.
Automotive
Cost of Sales
Automotive cost of sales was $3.8 billion and
$3.4 billion during the three months ended June 30,2007 and 2006, respectively, an increase of $.4 billion or
11.8%. The increase in Automotive cost of sales is primarily due
to the higher vehicle sales volume which had an impact of
$.4 billion, higher content cost of $.1 billion and
the impact of unfavorable foreign currency exchange rates of
$.1 billion offset by favorable product mix of
$.2 billion. Automotive cost of sales as a percentage of
net sales and revenues was 88.8% during the three months ended
June 30, 2007 as compared to 89.0% during the three months
ended June 30, 2006.
For the six months ended June 30, 2007 and 2006, LAAM
reported automotive cost of sales of $7 billion and
$6.4 billion, respectively, an increase of $.6 billion
or 10.2%. The increase in Automotive cost of sales is primarily
due to the higher vehicle sales volume which had an impact of
$.7 billion, higher content cost of $.1 billion and
the impact of unfavorable foreign currency exchange rates of
$.2 billion offset by favorable product mix of
$.3 billion. Automotive cost of sales as a percentage of
net sales and revenues was 88.6% during the six months ended
June 30, 2007 as compared to 90.9% during the six months
ended June 30, 2006.
Selling,
General, and Administrative Expense
Selling, general, and administrative expense was
$297 million during the three months ended June 30,2007, as compared to $183 million for the comparable 2006
period, an increase of $114 million or 62.3%. The increase
in Selling, general, and administrative expense is primarily due
to a $66 million charge recorded by GM do Brasil during the
second quarter of 2007 for additional retirement benefits under
a government sponsored pension plan. The remainder of the
increase, $48 million, is attributed primarily to increased
marketing expense throughout the region.
Selling, general, and administrative expense was
$474 million during the six months ended June 30,2007, as compared to $334 million for the comparable 2006
period, an increase of $140 million or 41.9%. The increase
in Selling, general, and administrative expense is also
primarily due to the additional retirement benefit recorded at
GM
Latin America/Africa/Mid-East (LAAM)
Operations — (concluded)
GM do Brasil mentioned above along with increased administrative
and marketing expenses of $74 million throughout the region
in support of the higher volume levels.
Automotive
Interest and Other Income (Expense)
Automotive interest and other income (expense) was
$109 million during the three months ended June 30,2007 as compared to an expense of ($36) million for the
comparable 2006 period, an increase of $145 million. This
increase was primarily driven by a gain of $87 million
recorded at GM do Brazil in the second quarter of 2007
associated with the recovery of previously overpaid employee
taxes and benefits. Also during the second quarter of 2007, GM
do Brasil reversed a previously established tax reserve for
$34 million associated with duties, federal excise tax and
related matters which were no longer required.
During the second quarter of 2007, GM do Brasil recorded a
$43 million charge for potential taxes and related matters
concerning improperly registered material included in
consignment contracts. This amount represents the low end of the
range of potential additional taxes and fines that may be
assessed. The range of possible fines based on information
available is from $43 million to $450 million. GM do
Brasil is providing documentation to the tax authorities that
may reduce the fines that will eventually be paid.
Automotive interest and other income (expense) was
$125 million during the six months ended June 30, 2007
as compared to an expense of ($36) million for the
comparable 2006 period, an increase of $161 million. This
increase was primarily attributed to the items mentioned above.
Income
Tax Expense (Benefit)
Income tax expense was $83 million during the three months
ended June 30, 2007 as compared to $28 million for the
comparable 2006 period, an increase of $55 million. This
increase was primarily driven by higher pre-tax income across
most GMLAAM business units, especially GM do Brasil and GM
Venezolana. This increase was partially offset by the tax
benefit of interest on equity transactions executed at GM do
Brasil during the second quarter of 2007, which are treated as
dividends for U.S. GAAP reporting purposes, and therefore
yield a current tax benefit of $14 million.
Income tax expense was $136 million during the six months
ended June 30, 2007 as compared to $85 million for the
comparable 2006 period, an increase of $51 million. This
increase was primarily attributed to increased pre-tax income
mentioned above.
Income before income taxes, other
equity income and minority interests
282
392
376
1,073
Income tax expense
53
104
80
356
Equity income (loss) and minority
interests, net of tax
(2
)
88
47
151
Net income
$
227
$
376
$
343
$
868
Net margin
4.2
%
9.9
%
3.4
%
12.1
%
(Volume in thousands)
Production volume(1)(4)
571
482
1,115
954
Vehicle unit sales(2)(3)(5)
Industry
5,063
4,629
10,464
9,714
GM
338
312
726
635
GM as a percentage of industry
6.7
%
6.7
%
6.9
%
6.5
%
GM market share —
Australia
14.5
%
14.7
%
14.7
%
15.6
%
GM market share —
China(3)
10.8
%
12.3
%
12.3
%
12.9
%
(1)
Includes GM Daewoo Auto & Technology Co., Ltd.,
Shanghai General Motors Co., Ltd., and SAIC-GM-Wuling Automobile
Co., Ltd. joint venture production
(2)
Includes GM Daewoo Auto & Technology Co., Ltd.,
Shanghai General Motors Co., Ltd., and SAIC-GM-Wuling Automobile
Co., Ltd. joint venture sales
(3)
Includes SAIC-GM-Wuling Automobile Co., Ltd. joint venture sales.
(4)
Production volume represents the number of vehicles manufactured
from GM’s assembly facilities, and also includes vehicles
produced by joint ventures.
(5)
Vehicle unit sales primarily represent sales to the ultimate
customer.
GMAP reported net income of $227 million and
$376 million for the three months ended June 30, 2007
and 2006, respectively. For the six months ended June 30,2007 and 2006, GMAP reported net income of $343 million and
$868 million, respectively, a decrease of
$525 million, or 60.5% due to the gains realized in 2006 as
a result of sale of GM’s Suzuki and Isuzu Investments.
Regional
Vehicle Sales
Industry vehicle unit sales in the Asia Pacific region increased
9% during the three months ended June 30, 2007, to
5.1 million units, compared to 4.6 million units
during the three months ended June 30, 2006. This result
reflects strong growth in China, where industry vehicle unit
sales increased 23% to 2.2 million units during the three
months ended June 30, 2007 from 1.8 million units
during the three months ended June 30, 2006. Industry
vehicle
unit sales in the Asia Pacific region increased 7.7% during the
six months ended June 30, 2007, to 10.5 million units,
compared to 9.7 million units during the six months ended
June 30, 2006. This result reflects strong growth in China,
where industry vehicle unit sales increased 22% to
4.3 million units during the six months ended June 30,2007 from 3.5 million units during the six months ended
June 30, 2006. Following a record year in 2006,
China’s vehicle market has remained strong in 2007, and GM
continues to capitalize on the demand in the China passenger car
and light commercial vehicle markets.
GMAP increased its vehicle unit sales in the Asia Pacific region
by 8% during the three months ended June 30, 2007, to
338,000 units, from 312,000 units during the three
months ended June 30, 2006. GMAP increased its vehicle unit
sales in the Asia Pacific region by 14.3% during the six months
ended June 30, 2007, to 726,000 units, from
635,000 units during the six months ended June 30,2006. GMAP’s sales in China accounted for
234,000 units sold during the three months ended
June 30, 2007, and 523,000 units sold during the six
months ended June 30, 2007. GMAP’s sales in China
increased 6% during the three months ended June 30, 2007,
from the comparable prior year period, and increased 16% during
the six months ended June 30, 2007, from the comparable
prior year period. China sales represent 69% and 72% of total GM
sales in the Asia Pacific region for the three and six months
ended June 30, 2007, respectively. GMAP’s second
quarter 2007 market share remained unchanged from the second
quarter of 2006 at 6.7%, and GMAP’s first half 2007 market
share increased 0.4 percentage points relative to the first
half of 2006. Relative to the second quarter and first half of
2006, GMAP gained market share in India and South Korea, and
lost market share in China, Australia, and Thailand. Market
share gains in India were supported by the addition of the Aveo
and Spark to the vehicle portfolio. Although GM reported record
sales in China in the first half of 2007, market share
deteriorated due to continued robust industry growth. GM
Holden’s market share in Australia deteriorated due to a
reduction in the share of the upper-medium segment, relative to
the total industry.
Total
Net Sales and Revenue
GMAP revenue grew $1.6 billion, or 44.0%, to
$5.4 billion during the three months ended June 30,2007, compared to $3.8 billion during the three months
ended June 30, 2006. The revenue growth was primarily due
to an 8.1% increase in GMAP domestic unit sales, a 37.4%
increase in GM Daewoo Auto & Technology Co., Ltd. (GM
Daewoo) export unit sales to a diverse global customer base
primarily driven by Captiva/Winstrom launch, and favorable
pricing and product mix at Holden of $.2 billion due to the
VE Commodore in the third quarter of 2006. Favorable vehicle mix
increased revenue by $118 million, while favorable foreign
currency exchange rates, primarily related to the Australian
dollar increased revenue by $65 million.
GMAP revenue grew 39.6% to $10 billion during the six
months ended June 30, 2007, compared to $7.2 billion
during the six months ended June 30, 2006, driven by
factors similar to those which drove year-over-year second
quarter revenue growth.
Automotive
Cost of Sales
Automotive cost of sales increased by $1.4 billion or 39.9%
to $4.8 billion during the three months ended June 30,2007 compared to $3.4 billion during the three months ended
June 30, 2006. This is primarily due to a 36% export unit
volume increase at GM Daewoo during the three months ended
June 30, 2007, relative to the comparable period in 2006.
Automotive cost of sales as a percentage of net sales and
revenues was 88.5% during the three months ended June 30,2007 as compared to 91% in the second quarter of 2006.
Automotive cost of sales increased by 40.1% to $9 billion
during the six months ended June 30, 2007 compared to
$6.4 billion during the six months ended June 30,2006. This is primarily due to a 32% vehicle unit volume
increase at GM Daewoo during the six months ended June 30,2007, relative to the comparable period in 2006. Automotive cost
of sales as a percentage of net sales and revenues was 89.7%
during the six months ended June 30, 2007 as compared to
89.4% in the first half of 2006.
In the three months ended June 30, 2007, GMAP recognized
separation costs of $8 million related to restructuring
activities at GM Holden, and impairment charges of
$5 million related to the write-down of product-specific
assets at GM Holden. In the six months ended June 30, 2007,
GMAP additionally recognized separation costs of
$40 million related to restructuring activities at GM
Holden and impairment charges of $9 million related to the
write-down of product-specific assets at GM Holden.
Selling,
General, and Administrative Expense
Selling, general, and administrative expenses increased by
$.1 billion in the three and six month periods ended
June 30, 2007 as compared to the three and six month
periods ended June 30, 2006 due to higher advertising,
sales promotion, and administrative expenses which supported
higher vehicle unit sales.
Automotive
Interest and Other Income (Expense)
Automotive interest and other income (expense) in the three
months ended June 30, 2006 included a $311 million
gain from the sale of approximately 90 million shares of
Isuzu Motors Limited. Automotive interest and other income
(expense) in the six months ended June 30, 2006 included a
$666 million gain related to the sale of 85% of GM’s
investment in Suzuki.
Loss before income taxes, other
equity income and minority interests
(579
)
(426
)
(788
)
(937
)
Income tax benefit
(549
)
(307
)
(666
)
(628
)
Net loss
$
(30
)
$
(119
)
$
(122
)
$
(309
)
The net sales and revenue line primarily reflects prior year
eliminations between our automotive business and GMAC. The
remainder is associated with our corporate leasing activities.
Corporate and Other includes certain centrally managed costs
such as interest and tax reserves, corporate expenditures, the
elimination of intersegment transactions, and costs related to
pension and postretirement benefits for Delphi and other
retirees of divested businesses for which GM has retained
responsibility. These costs declined by $135 million and
$289 million for the three and six months ended
June 30, 2007, respectively, compared to the same periods
in the prior year. These declines are distributed between
Automotive cost of sales and Selling, general, and
administrative expenses, with a $117 million decline in
Automotive cost of sales and a $18 million in Selling,
general, and administrative expenses in second quarter of 2007
and $231 million in Automotive cost of sales and
$58 million in Selling, general, and administrative
expenses for the year to date. The declines are primarily due to
the UAW Health Care Settlement Agreement, the U.S. salaried
workforce’s increased participation in the cost of health
care, and capping GM’s contributions to salaried retiree
health care at the level of 2006 expenditures.
Other expense of $575 million for the three and six months
ended June 30, 2007 relates to a charge associated with
GM’s support of the bankruptcy and reorganization of
Delphi. This charge consists of incremental Delphi retiree
health care costs, reimbursement of labor costs at certain
Delphi facilities, and reimbursement of certain pension
obligations for Delphi employees. For a further discussion refer
to “Delphi Bankruptcy” discussed in Note 9
For the three and six months ended June 30, 2006,
respectively, Other expense of $157 million and
$303 million relates intersegment eliminations.
The net tax benefits recognized in Corporate and Other for the
three and six months ended June 30, 2007 increased by
$242 million and $38 million compared to the same
period in the prior year. As discussed in Note 10, GM
adopted FIN 48 as of January 1, 2007. All adjustments
related to FIN 48 are recorded in the Corporate and Other
segment. The higher tax benefit in the three months ended
June 30, 2007 is primarily the result of uncertain tax
positions now deemed more-likely-then-not to be realized and the
benefit associated with the Delphi charge discussed above.
FIO
Operations Financial Review
GM’s FIO business included the operating results of
GMAC’s lines of businesses consisting of Automotive Finance
Operations, Mortgage Operations; Insurance, and Other, which
includes GMAC’s Commercial Finance business and GMAC’s
equity investment in Capmark (previously known as GMAC
Commercial Mortgage). On November 30, 2006, GM sold a 51%
controlling interest in GMAC to FIM Holdings LLC (FIM Holdings).
GM’s remaining interest in GMAC is accounted for using the
equity method. Also included in FIO is “Other
Financing” which includes financing entities that are not
consolidated by GMAC as well as two special purpose entities
holding automotive leases previously owned by GMAC and its
affiliates that were transferred to GM as part of the GMAC
Transaction in November 2006. Therefore, for the three and six
months ended June 30, 2007, FIO’s operations primarily
reflects its 49% share of the operating results of GMAC LLC as
compared to the operating results of GMAC LLC fully consolidated
for the comparable 2006 period.
FIO had a net income of $196 million and $100 million
for the three months ended June 30, 2007 and 2006,
respectively, and net income of $110 million and
$597 million for the six months ended June 30, 2007
and 2006, respectively.
GMAC LLC reported net income available to members of
$240 million and a net loss of $(116) million during
the three and six months ended June 30, 2007, as compared
to net income of $787 million and $1,283 million for
the comparable periods of 2006. Included in FIO’s
“Other Financing” is $57 million and
$86 million for three and six months ended June 30,2007 respectively, of net income relating to the two special
purpose entities holding outstanding leases previously owned by
GMAC which would have been included in GMAC’s net income in
the prior year.
GMAC net income for the three and six months ended June 30,2007 reflects strong earnings in the global automotive finance
and insurance businesses which offset losses in the Mortgage
business, which continued to be adversely affected by a decline
in the residential housing market and deterioration in the
nonprime securitization market in the United States.
Automotive Finance Operations benefited in the three months and
six months ended June 30, 2007, due to strong lease
residuals, stable credit performance, and increases in servicing
income. These results reflect improved margins in North America
and continued margin pressure overseas.
Mortgage earnings decreased significantly in the three months
and six months ended June 30, 2007 compared to same period
in 2006. The 2007 results continue to be adversely affected by
domestic economic conditions, which include increases in
nonprime delinquencies, a significant deterioration in the
nonprime securitization market, and
instability in the residential housing market. Insurance
Operations increased in the three months and six months ended
June 30, 2007, due to favorable underwriting results
primarily driven by lower losses and loss adjustment expenses,
which were partially offset by unfavorable acquisition and
underwriting expenses and lower realized capital gains.
Key
Factors Affecting Future and Current Results
The following discussion identifies the key factors, known
events, and trends that could affect our future results:
Turnaround
Plan
Our top priorities continue to be improving our business in
North America and achieving global competitiveness in an
increasingly global environment, thus positioning GM for
sustained profitability and growth in the long term, while
maintaining strong liquidity at the same time. GM has been
systematically and aggressively implementing its turnaround plan
for GMNA’s business to return the operations to
profitability and positive cash flow as soon as possible. Our
turnaround plan for GMNA is built on four elements: achieving
and sustaining product excellence; revitalizing sales and
marketing strategy; accelerating cost reductions and quality
improvements; and addressing health care/legacy cost burden.
The following update describes what we have done so far to
achieve these elements:
Product Excellence. GM continues to focus
significant attention on maintaining consistent product
freshness by introducing new vehicles and reducing the average
vehicle lifecycle. In 2007 we expect that approximately 40% of
GMNA’s retail sales will come from vehicles launched within
the prior 18 months. GM expects its total capital
expenditures going forward to be in the $8 billion range in
2007 and 2008. GMNA is also allocating capital and engineering
to support more fuel-efficient vehicles, including hybrid
vehicles in the United States, and is increasing production of
active fuel management engines and six-speed transmissions. In
addition, GM is undertaking a major initiative in alternative
fuels through sustainable technologies such as E85 Flex Fuel
vehicles, which run on gasoline, ethanol, or any combination of
the two fuels.
Revitalize Sales and Marketing Strategy. GM is
pursuing a revised sales and marketing strategy by focusing on
clearly differentiating our brands, optimizing our distribution
network, growing in key metropolitan markets, and re-focusing
our marketing efforts on the strength and value of our products.
In January 2006, GM significantly lowered manufacturer’s
suggested retail prices on vehicles that accounted for
approximately 80% of its 2006 model year automotive sales
volume. GM’s promotion strategy now emphasizes its brands
and vehicles, rather than price incentives. In addition, GM has
begun increasing advertising in support of new products and
specific marketing initiatives to improve GM’s sales
performance in key under-developed states. GM’s pricing
strategy, improved quality, and product execution, reduced sales
to daily rental fleets, as well as a strong market for used
vehicles, resulted in higher residual values on GM’s cars
and trucks. For 2007, GM is continuing to focus on consistent
alignment of its dealers, particularly among Buick, Pontiac, and
GMC dealers, improved retail performance in key metropolitan
markets, and further reductions in sales to daily rental
companies.
Accelerate Cost Reductions and Quality
Improvements. Since our November 2005
announcement of our strategy to reduce structural costs in the
manufacturing area, GM has introduced a variety of initiatives
to accomplish that strategy. In 2007, we are on track to realize
the $9 billion average annual structural-cost savings
target versus 2005 in our GMNA and Corporate and Other segments.
GM realized $6.8 billion in structural cost reductions in
North America during 2006, exceeding the $4 billion of
structural cost reductions estimated for 2006 in GM’s 2005
Annual Report on
Form 10-K.
This improvement is due largely to the success of the attrition
programs, including the effect of the pension remeasurement. The
expected total annual cash savings from structural cost
reductions is approximately $5 billion. In addition, GM is
focusing on our long-term goal of reducing
Key
Factors Affecting Future and Current
Results — (continued)
Turnaround
Plan — (concluded)
our global automotive structural costs to 25% of global revenue.
For 2006, global automotive structural costs were less than 30%
of revenue, down from approximately 35% in 2005.
Reducing material costs remains a critical part of GMNA’s
overall long-term cost reduction plans, although improved
performance in purchasing has been offset by higher commodity
prices for steel and non-ferrous metals and support for troubled
suppliers. GM continues its aggressive pursuit of material cost
reductions via improvements in its global processes for product
development, which will enable further commonization and
application of parts among vehicle architectures, as well as
through the continued use of the most competitive supply sources
globally and the extensive use of benchmarking and supplier
footprint optimization. By leveraging its global reach to take
advantage of economies of scale in purchasing, engineering,
advertising, salaried employment levels, and indirect material
costs, GM seeks to continue to achieve cost reductions. GM has
seen significant improvements in both warranty and other quality
related costs over the past several years, which has enabled the
implementation of the extended powertrain warranty. In 2007, we
are continuing to focus on reducing these costs.
Address Health Care/Legacy Cost
Burden. Addressing the legacy cost burden of
health care for employees and retirees in the United States is
one of the critical challenges facing GM. In October 2005, we
announced an agreement with the UAW that reduced GM’s
hourly retiree health-care obligations. GM began recognizing the
benefit from the UAW Health Care Settlement Agreement during the
three months ended September 30, 2006. The remeasurement of
the U.S. hourly OPEB plans as of March 31, 2006
generated a $1.3 billion reduction in OPEB expense and an
approximate $14.5 billion reduction in the OPEB obligation. This
reduction in expense was partially offset by the recognition of
expense associated with the approximate $3 billion related
to capped benefits expected to be paid from GM contributions to
the new UAW Mitigation Plan. In April 2006, GM and the
International Union of Electrical Workers Communications Workers
of America (IUE-CWA) also reached a tentative agreement to
reduce health-care costs that is similar to the UAW Health Care
Settlement Agreement, which was ratified by the IUE-CWA
membership in April 2006 and received court approval in November
2006. GM is also increasing the U.S. salaried
workforce’s participation in the cost of health care. In
February 2006, GM announced that beginning in January 2007, it
would cap its contributions to salaried retiree health care at
the level of its 2006 expenditures. After 2006, when average
costs exceed established limits, GM will make additional plan
changes that affect cost-sharing features of program coverage,
effective with the start of the next calendar year. Program
changes may include, but are not limited to, higher monthly
contributions, deductibles, coinsurance, out-of-pocket maximums,
and prescription drug payments. In October 2006, the GM board of
directors approved a reduction in the levels of coverage for
corporate-paid life insurance for salaried retirees. GM will
continue to work with its employees, health-care providers, and
the U.S. government to find solutions to the critical
issues posed by the rising cost of health care. Initiatives
during the six months ended June 30, 2007 included using
the global purchasing process to identify more cost-effective
suppliers and auditing the eligibility of plan participants as
well as working with the UAW and other vehicle manufacturers to
support a variety of federal legislation that would reduce
employer health care costs.
Labor
Negotiations
GM’s current collective bargaining agreement with the UAW
expires in September 2007. The negotiations present both risks
and opportunities to address cost competitiveness issues.
GM recognizes the impact that any resulting labor stoppages
could have on GM, its suppliers, and its dealers. If the
collective bargaining agreement expires before a new agreement
is reached, GM anticipates that it would attempt to persuade the
UAW to support continuing its operations while negotiations
continue. It is possible, however, that the expiration of the
collective bargaining agreement could result in labor
disruptions affecting some or all GM facilities in the United
States, or the operations of some of its suppliers that employ
workers represented by the UAW. A lengthy strike by the UAW that
involves all or a significant portion of our manufacturing
facilities in
Key
Factors Affecting Future and Current
Results — (continued)
Labor
Negotiations — (concluded)
the United States would have a material adverse effect on our
operations and financial condition, particularly our liquidity.
Delphi
Bankruptcy
General. In October 2005, Delphi filed a
petition for Chapter 11 proceedings under the
U.S. Bankruptcy Code for itself and many of its
U.S. subsidiaries. Delphi continues to assure GM that it
expects no disruption in its ability to supply GM with the
systems, components, and parts it needs as Delphi pursues a
restructuring plan under the Chapter 11 process. Although
the challenges faced by Delphi during its restructuring process
could create operating and financial risks for GM, that process
is also expected to present opportunities for GM. These
opportunities include reducing, over the long term, the
significant cost penalty GM incurs in obtaining parts from
Delphi, as well as improving the quality of systems, components,
and parts GM procures from Delphi.
Since the initial filing, GM has worked and will continue to
work constructively with Delphi, Delphi’s unions, and other
participants in Delphi’s Chapter 11 restructuring
process. Delphi, GM, and other interested parties have
negotiated certain arrangements described below (the
“Proposed Plan”) that we believe will provide a basis
for a successful consensual resolution of Delphi’s
Chapter 11 proceedings. However, there can be no assurance
that these proceedings will be resolved substantially on the
terms of the Proposed Plan or on other consensual terms, or that
GM will be able to realize any benefits as a result of
Delphi’s restructuring process.
Delphi’s financial distress and Chapter 11 filing
posed significant risks to GM for two reasons: First, GM’s
production operations rely on systems, components, and parts
provided by Delphi, GM’s largest supplier, and could be
substantially disrupted if Delphi rejects its GM supply
agreements or its labor agreements and thereby affects the
availability or price of the required systems, components, or
parts. Second, in connection with the 1999 spin-off of Delphi,
GM provided limited benefit guarantees with regard to certain
hourly employees who were transferred to Delphi from GM, which
could be triggered in connection with the Chapter 11
proceedings.
In March 2006, Delphi filed motions in Bankruptcy Court seeking
authority to reject its U.S. labor agreements and modify
retiree welfare benefits, and to reject certain supply contracts
with GM. Hearings on these motions have been adjourned
indefinitely while the parties seek a consensual resolution.
Delphi’s motions to reject its U.S. labor agreements
have been settled as explained below. If the Proposed Plan is
not successful, Delphi or one or more of its affiliates could be
subject to labor disruptions or could reject or threaten to
reject individual contracts with GM, either for the purpose of
exiting specific lines of business or in an attempt to increase
the price GM pays for certain parts and components. We believe
that Delphi is likely to complete a restructuring based on the
Proposed Plan, but we are seeking to minimize our risks in case
the Proposed Plan is not consummated by protecting our right of
setoff against the $1.15 billion we owed to Delphi in the
course of ordinary business when it made its Chapter 11
filing. However, the extent to which these obligations are
covered by our right to setoff may be subject to dispute by
Delphi, the creditors’ committee, or Delphi’s other
creditors, and limitation by the court. GM cannot provide any
assurance that it will be able to setoff such amounts fully or
partially. To date, GM has taken setoffs of approximately
$53.6 million against that pre-petition obligation, with
Delphi’s agreement.
Benefit
Guarantee Agreements.
In connection with the 1999 spin-off of Delphi, GM made
commitments to guarantee limited pension and OPEB payments to
eligible hourly employees who were transferred to Delphi from GM
(Covered Employees), entering into separate agreements with the
UAW, the IUE-CWA, and the United Steel Workers (Benefit
Guarantee Agreements). Each Benefit Guarantee Agreement contains
separate benefit guarantees relating to pension and OPEB
obligations, with different triggering events under which GM
could be liable if Delphi fails to provide the
Key
Factors Affecting Future and Current
Results — (continued)
Delphi
Bankruptcy — (continued)
corresponding benefit at the required level. Therefore, GM could
incur liability under one of the guarantees (e.g., OPEB) without
triggering the other guarantees (e.g., pension). In addition,
with respect to pension benefits, GM’s guarantee of pension
benefits arises only to the extent that pension benefits
provided both by Delphi (or an applicable successor) and by the
Pension Benefit Guaranty Corporation fall short of the
guaranteed amounts.
GM’s obligations under the Benefit Guarantee Agreements
have not been triggered by Delphi’s Chapter 11 filing
or its motions in Bankruptcy Court to reject its U.S. labor
agreements and modify retiree welfare benefits. The Benefit
Guarantee Agreements do not obligate GM to guarantee any
benefits for Delphi retirees in excess of the corresponding
benefits GM provides at the time to its own hourly retirees.
Accordingly, any reduction of the benefits GM provides to its
hourly retirees would reduce GM’s obligations under the
corresponding benefit guarantee.
A separate agreement between GM and Delphi requires Delphi to
indemnify GM for any payments under the benefit guarantees to
the UAW employees or retirees. Any recovery by GM under
indemnity claims against Delphi, however, might be subject to
partial or complete discharge in the Delphi reorganization
proceeding. As a result, GM’s claims for indemnity may not
be paid fully or partially.
The Benefit Guarantee Agreements were originally scheduled to
expire on October 18, 2007, unless triggered before then.
As described below, GM has agreed to extend the expiration date
of the existing Benefit Guarantee Agreement with the UAW from
October 18, 2007 to December 31, 2007, and further to
March 31, 2008 if approval of the Proposed Plan is being
sought. Delphi has agreed to extend its agreement to indemnify
GM for payments made under the Benefit Guarantee Agreement with
the UAW on the same basis and for the same time period. GM has
also agreed to obligations under the Benefit Guarantee
Agreements with the UAW under certain circumstances described
below under “Proposed Consensual
Resolution — Labor MOUs”.
Delphi
Attrition Programs.
GM has also assumed costs related to Delphi hourly employees who
participated in special attrition and buyout programs, which
provided a combination of early retirement programs and other
incentives to reduce hourly employment at both GM and Delphi. In
2006, 13,800 Delphi employees represented by the UAW and 6,300
Delphi employees represented by the IUE-CWA elected to
participate in these attrition and buyout programs. If
Delphi’s bankruptcy proceedings are not resolved
consensually according to the Proposed Plan, or otherwise, GM
will have a pre-petition, general unsecured claim against Delphi
of $3.8 billion related to some of GM’s costs under
these attrition and buyout programs, $3.5 billion of such
claim would be subject to objections on any grounds other than
that the claim did not arise under the terms of certain
pre-existing contractual agreements between GM and Delphi.
Proposed
Consensual Resolution
GM and Delphi have entered into agreements with the UAW and the
IUE-CWA. In July GM also indicated its support for a new
investment agreement entered into between Delphi and a group of
plan investors. We believe that the arrangements contemplated by
these agreements, which are described in this section, should
provide a consensual basis for a plan of reorganization which
would resolve the issues discussed above.
Labor MOUs. On June 22, 2007, GM, Delphi,
and the UAW entered into a Memorandum of Understanding regarding
Delphi’s restructuring (UAW MOU), which was ratified by the
UAW membership on June 28 and became effective upon bankruptcy
court approval on July 19, 2007. The court order also
settled Delphi’s motion to reject the U.S. labor
agreements with the UAW. The UAW MOU covers a number of issues
including (1) an extension of the GM-UAW benefit guarantee
and the related Delphi indemnity, (2) flowbacks by certain
Delphi UAW employees, (3) settlement of a UAW claim against
Delphi, and (4 GM support for certain specific Delphi sites.
Key
Factors Affecting Future and Current
Results — (continued)
Delphi
Bankruptcy — (continued)
In the UAW MOU, GM agreed to extend the expiration date of the
Benefit Guarantee Agreement with the UAW from October 18,2007 to December 31, 2007. If Delphi has commenced
solicitation of acceptance of its plan of reorganization prior
to December 31, 2007, but the plan has not been confirmed
and substantially consummated by then, the Benefit Guarantee
Agreement with the UAW would be further extended to
March 31, 2008. Delphi agreed to extend its agreement to
indemnify GM for payments made under the Benefit Guarantee
Agreement with the UAW on the same basis and for the same time
period. GM also agreed that if Delphi terminates its pension
plan, ceases to provide on-going service, or fails or refuses to
provide post-retirement medical benefits for certain UAW
employees at any time before both (a) GM and Delphi execute
a comprehensive settlement agreement resolving the financial,
commercial and other matters between them (GM-Delphi Settlement
Agreement) and (b) the U.S. Bankruptcy Court
substantially confirms a Delphi plan of reorganization that
incorporates, approves and is consistent with the GM-Delphi
Settlement Agreement, the applicable provisions of the Benefit
Guarantee Agreement will be triggered for those UAW employees.
GM also agreed in the UAW MOU to allow Delphi UAW employees who
were on the payroll prior to October 8, 2005 to flowback to
GM and be offered job opportunities at GM for purposes of OPEB
under certain circumstances. GM will also permit certain Delphi
UAW represented employees to flowback to GM if they agree to
retire by September 1, 2007 under the retirement incentives
agreed to by Delphi and the UAW in the UAW MOU, and GM will
assume OPEB obligations for such retirees. With respect to the
retirement incentives, buy outs, buy downs and severance
payments agreed to by Delphi and the UAW in the UAW MOU,
GM’s financial contribution for such payments will be
covered in the GM-Delphi Settlement Agreement, which has not yet
been finalized. GM further committed in the UAW MOU to pay
$450 million to settle a UAW claim against Delphi, which
the UAW has directed GM to pay directly to the GM UAW VEBA
trust. GM will be required to make this payment upon execution
of the GM-Delphi Settlement Agreement and substantial
confirmation of a reorganization plan for Delphi that
incorporates the GM-Delphi Settlement Agreement.
In the UAW MOU, GM also agreed to make commitments to certain
product programs at certain specified Delphi sites. In addition,
at certain Delphi sale sites (Saginaw Steering —
Saginaw, Sandusky, and Adrian) and the Delphi
“Footprint” sites (Flint East, Needmore Road, and
Saginaw Manufacturing), GM agreed to cause the production
operations and the active and inactive Delphi UAW employees to
be transferred to a third party by certain dates and under
certain circumstances. Finally, GM agreed to provide a certain
number of job opportunities at each of the Delphi
“Footprint” sites by providing business at Flint and
Needmore Road to a facility operated by GM or a third party
designated by GM, either of which would operate at or near the
site, and at Saginaw Manufacturing to a facility operated by a
third party.
On August 5, 2007, GM entered into Memorandum of
Understanding with Delphi and the
IUE-CWA
(IUE-CWA MOU), which provides terms that are similar to the UAW
MOU with regard to establishing terms related to the consensual
triggering of the Benefit Guarantee Agreement offering an
additional attrition program, and continuing operations at
certain Delphi sites for which GM committed to certain product
programs. The IUE-CWA MOU is subject to ratification by the
IUE-CWA membership and approval of the Bankruptcy Court. We
expect to enter into similar agreements with other
U.S. labor unions that represent Delphi hourly employees.
Delphi Reorganization. On July 7, 2007,
Delphi announced the termination of the December 18, 2006
Plan Framework Support Agreement with GM and a consortium of
potential investors and the related investment agreement. On
July 18, Delphi announced that it would seek bankruptcy
court approval of an equity purchase and commitment agreement
(EPCA) with a modified investor group led by Appaloosa
Management L.P., which would be supported by Delphi’s
Statutory Committees and GM. On August 2, 2007, the
Bankruptcy Court issued an order approving the EPCA. Under the
terms of the EPCA and the GM-Delphi Settlement Agreement as
contemplated, GM would release claims against Delphi in exchange
for $2.7 billion in cash and an unconditional release of
any alleged claims against GM by the bankruptcy estate. In
addition, GM will assume up to $2 billion but not less than
$1.5 billion of net pension obligations of Delphi, and GM
will receive a note payable for the amount of the
Key
Factors Affecting Future and Current
Results — (continued)
Delphi
Bankruptcy — (concluded)
obligations assumed, which will be payable in cash by Delphi on
market terms within 10 days after the plan of
reorganization becomes effective. As with other customers,
certain GM claims related to ordinary business would flow
through the Chapter 11 proceedings and be satisfied by
Delphi after the reorganization in the ordinary course of
business.
GM Claims
Against Delphi.
In July 2006, GM filed a Consolidated Proof of Claim, in
accordance with the Bankruptcy Court’s procedures order,
setting forth GM claims (including the claims of various GM
subsidiaries) against Delphi and the other debtor entities. The
exact amount of GM’s claims cannot be established because
of the contingent nature of many of the claims involved and the
fact that the validity and amount of the claims may be subject
to objections from Delphi and other stakeholders, but, based on
currently available data, the amount of GM’s claims could
be as much as $13 billion. Although the Proof of Claim
preserves GM’s right to pursue recovery of its claims from
Delphi, these claims would be included in the settlement of all
claims under the Proposed Plan.
GM
Contingent Liability.
Depending on the outcome of the current negotiations and other
factors, GM believes that it is probable that it has incurred a
contingent liability due to Delphi’s Chapter 11
filing. Based on currently available data and ongoing
discussions with Delphi and other stakeholders, GM believes that
the range of the contingent exposures is approximately
$7 billion. GM currently expects under the GM-Delphi
Settlement Agreement to reimburse Delphi for certain labor
expenses with an initial payment of up to approximately
$500 million when it emerges from bankruptcy, and to
provide annual labor-related payments between $300 million
and $400 million and annual transitional payments of
approximately $100 million, which will be recognized in the
future as incurred. GM continues to expect that the cost of
these reimbursements will be more than offset in the long term
by its savings from reductions to the $2 billion price
penalty it now pays Delphi annually for systems, components, and
parts.
During 2006, amounts previously recorded under the benefit
guarantee were reclassified to GM’s OPEB liability as GM
has assumed the OPEB obligation for approximately 17,800 Delphi
employees who have returned back to GM to continue working or
retire from GM.
GM believes that it is likely that the parties will reach a
consensual resolution, so that no payments will be required
under the Benefit Guarantee Agreement, except as provided for
under the UAW MOU and similar agreements with other Delphi labor
unions. If, however, because of unexpected events GM is required
to make OPEB payments to current Delphi retirees under the
Benefit Guarantee Agreements, GM would expect that such payments
would be made from ongoing operating cash flow and financings
and would not have a material effect on GM’s cash flows in
the short term. If such payments were required, however, they
would be likely to increase over time and could have a material
effect on GM’s liquidity in coming years. (For reference,
Delphi’s 2006 Annual Report on
Form 10-K
reported that in 2006 it paid benefits of $229 million to
hourly and salaried retirees; salaried retirees are not covered
under the Benefit Guarantee Agreements).
Because negotiations are not complete, the actual impact of the
resolution of issues related to Delphi cannot be determined
until the Bankruptcy Court’s approval of a comprehensive
resolution and plan of reorganization, and there can be no
assurance that the parties will reach a comprehensive resolution
and plan or that the Bankruptcy Court will approve such a
resolution and plan, or that any resolution and plan will
include the terms described above.
Investigations
As previously reported, GM is cooperating with federal
governmental agencies in connection with a number of
investigations.
Key
Factors Affecting Future and Current
Results — (concluded)
Investigations — (concluded)
The SEC has issued subpoenas and information requests to GM in
connection with various matters including restatements of its
previously disclosed financial statements in connection with
GM’s accounting for certain foreign exchange contracts and
commodities contracts, GM’s financial reporting concerning
pension and OPEB, certain transactions between GM and Delphi,
supplier price reductions or credits, and any obligation GM may
have to fund pension and OPEB costs in connection with
Delphi’s bankruptcy proceedings. In addition, the SEC has
issued a subpoena in connection with an investigation of our
transactions in precious metal raw materials used in our
automotive manufacturing operation, and a federal grand jury
issued a subpoena in connection with supplier credits.
GM has produced documents and provided testimony in response to
the SEC and federal grand jury subpoenas. GM will continue to
cooperate with the SEC and federal grand jury with respect to
these matters. A negative outcome of one or more of these
investigations could require us to restate prior financial
results, pay fines or penalties, or satisfy other remedies under
various provisions of the federal securities laws, and any of
these outcomes could under certain circumstances have a material
adverse effect on our business.
Liquidity
and Capital Resources
Investors or potential investors in GM securities consider cash
flows of the Automotive and FIO businesses to be a relevant
measure in the analysis of GM’s various securities that
trade in public markets. Accordingly, GM provides supplemental
statements of cash flows to aid users of GM’s Condensed
Consolidated Financial Statements in the analysis of liquidity
and capital resources.
This information reconciles to the Condensed Consolidated
Statements of Cash Flows after the elimination of “Net
investing activity with Financing and Insurance Operations”
and “Net financing activity with Automotive and
GM believes it has sufficient liquidity and financial
flexibility to meet its capital requirements over the short and
medium term under reasonably foreseeable circumstances. In the
third quarter of 2007, we may experience unusually large demands
on our liquidity resulting from events related to the expiration
of the current collective bargaining agreement with the UAW so
we have made preparations to have more liquidity available than
usual. Over the long term, GM believes that its ability to meet
its capital requirements will primarily depend on the successful
execution of its turnaround plan and the return of its North
American operations to profitability and positive cash flow.
Automotive’s available liquidity includes its cash
balances, marketable securities and readily-available assets of
its VEBA trusts. At June 30, 2007, Automotive’s
available liquidity was $27.2 billion compared with
$26.4 billion at December 31, 2006 and
$22.9 billion at June 30, 2006. The amount of
consolidated cash and marketable securities 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.
In addition to the $3.6 billion of readily-available VEBA
trust assets included in available liquidity, GM expects to have
access to additional VEBA trust assets over time to reimburse
OPEB plan costs. These additional VEBA trust assets totaled
$15.3 billion at June 30, 2007, making the total VEBA
trust assets available to GM $18.9 billion at June 30,2007. At December 31, 2006, the total VEBA trust assets
were $17.8 billion, $2.5 billion of which was
readily-available. At June 30, 2006, the total VEBA trust
assets were $18.4 billion, $2.8 billion of which was
readily-available. The increase in the total VEBA trust assets
since December 31, 2006 was due to asset returns during the
year.
GM also has a $4.6 billion standby revolving credit
facility with a syndicate of banks, of which $150 million
terminates in June 2008 and $4.5 billion terminates in July
2011. As of June 30, 2007, the availability under the
revolving credit facility was $4.6 billion. There are
$69 million of letters of credit issued under the credit
facility, but no loans are currently outstanding. Under the
$4.5 billion secured facility, borrowings are limited to an
amount based on the value of the underlying collateral, which
consists of certain North American accounts receivable and
inventory of GM, Saturn Corporation, and GM Canada, certain
plants, property and equipment of GM Canada, and a pledge of 65%
of the stock of the holding company for GM’s indirect
subsidiary GM de Mexico. In addition to the $4.5 billion
secured line of credit, the collateral also secures certain
lines of credit, automatic clearinghouse and overdraft
arrangements, and letters of credit provided by the same secured
lenders, totaling $1.5 billion. In the event of certain
work stoppages, the secured facility would be temporarily
reduced to $3.5 billion.
As an additional source of available liquidity, GM obtained a
$4.1 billion standby revolving credit agreement with a
syndicate of banks on June 22, 2007. This agreement
provides additional available liquidity that GM could use for
general corporate purposes, including working capital needs. The
facility is secured by GM’s common equity interest in GMAC
and matures in June 2008. As of June 30, 2007, the
availability under this facility was $4.1 billion. There
are no loans currently outstanding.
In May, 2007, GM entered into a revolving credit agreement
(Agreement) expiring in June, 2008, with a lender that provides
for borrowings of up to $.5 billion. The borrowings are to
be used for general corporate purposes including working capital
needs. No borrowings were outstanding under this Agreement at
June 30, 2007.
GM also has an additional $1.7 billion in undrawn committed
facilities (including certain off-balance sheet securitization
programs) with various maturities and $.9 billion in
undrawn uncommitted lines of credit. In addition, GM’s
consolidated affiliates with non-GM minority shareholders,
primarily GM Daewoo, have a combined $1.6 billion in
undrawn committed facilities.
In May, 2007, GM issued $1.5 billion principal amount of
Series D convertible debentures due in 2009. The debentures
were issued at par with interest at a rate of 1.5%, and may be
converted at the option of the holder into common stock based on
an initial conversion rate of .6837 shares per $25.00
principal amount of debentures, which represents an initial
conversion price of approximately $36.57 per share. In
connection with the issuance of the Series D debentures, GM
purchased a hedging instrument of the convertible debentures in
a private transaction. The hedge instrument is expected to
reduce the potential dilution with respect to our common stock
upon conversion of the Series D debentures, and effectively
increases the conversion price to $45.71 per share. The proceeds
from these debentures provide additional available liquidity
that GM may use for general corporate purposes, including
working capital needs.
Other potential measures to strengthen available liquidity could
include the sale of non-core assets, additional public or
private financing transactions, and recoveries under the equity
purchase and commitment agreement entered into with Delphi and
the Plan Investors. In June 2007, GM announced that it had
entered into an agreement to sell the commercial and military
operations of our Allison Transmission business for
$5.6 billion in cash plus assumed liabilities. The
transaction is expected to close in the third quarter of 2007.
In connection with Delphi, the recoveries to GM under the
arrangement contemplated by the equity purchase and commitment
agreement and current negotiations are expected to include cash.
GM anticipates that such additional liquidity, along with other
currently available liquidity described above could be used in
funding the turnaround plan and addressing the potential risks
and contingencies described below and in our 2006 Annual Report
on
Form 10-K
in “Risk Factors — Risks related to GM and its
Automotive business.”
GM believes that it is possible that issues may arise from the
restatement of its prior consolidated financial statements under
various other financing arrangements. These financing
arrangements consist principally of obligations in connection
with sale/leaseback transactions and other lease obligations
(including off-balance sheet arrangements) and do not include
GM’s public debt indentures. In view of the restatement of
its prior consolidated financial statements, GM has evaluated
the effect of its restatement under these agreements, including
its legal rights (such as its ability to cure) with respect to
any claims that could be asserted. Based on its review, GM
believes that amounts subject to possible claims of
acceleration, termination or other remedies are not likely to
exceed $2.7 billion (consisting primarily of off-balance
sheet arrangements), although no assurances can be given as to
the likelihood, nature, or amount of any claims that may be
asserted. Moreover, GM believes there may be economic or other
disincentives for third parties to raise such claims to the
extent they have them. Based on this review, GM reclassified
$257 million of these obligations, as of December 31,2006, from long-term debt to short-term debt. As of
June 30, 2007 the amount of such reclassified obligations
was $213 million. GM believes that it has sufficient
liquidity over the short and medium term, regardless of the
resolution of these matters. To date, GM has not received any
claims related to these matters.
Cash
Flow
The increase in available liquidity to $27.2 billion at
June 30, 2007 from $26.4 billion at December 31,2006 was primarily a result of positive operating cash flow (net
of a $1 billion contribution to the mitigation VEBA), an
increase in readily-available VEBA trust assets of
$1.1 billion and cash flows received from Financing and
Insurance operations. This increase was partially offset by
capital expenditures and the $1 billion capital
contribution to GMAC.
For the six months ended June 30, 2007, Automotive had
positive operating cash flow of $3.2 billion on a net
income of $.8 billion, including discontinued operations.
That result compares with the positive operating cash flow of
$5.5 billion and a net loss of $3.4 billion in the
comparable period of 2006. During the six months ended
June 30, 2006, GM withdrew $2 billion from its VEBA
trusts to reimburse OPEB plan costs. Operating cash flow for the
six month period ending June 30, 2007 was unfavorably
impacted by $.6 billion of costs related to the GMNA
restructuring initiative, $.2 billion of costs related to
the GME restructuring initiative, and $.3 billion of costs
related to the Delphi special attrition programs, for which the
charges were recorded in 2003 to 2006.
Capital expenditures of $2.9 billion and $3.1 billion
were a significant use of investing cash in the six months ended
June 30, 2007 and 2006, respectively. Capital expenditures
were primarily made for global product programs, powertrains and
tooling requirements.
On November 30, 2006, GM consummated the GMAC Transaction,
in which it sold a controlling 51% interest in GMAC to FIM
Holdings. Subsequently, in the first quarter of 2007, GM made a
capital contribution of $1 billion to GMAC to restore
GMAC’s adjusted tangible equity balance to the
contractually required amount of $14.4 billion. This
capital contribution was required due to the decrease in the
adjusted tangible equity balance of GMAC as of November 30,2006.
Debt
Automotive’s total debt, including capital leases,
industrial revenue bond obligations, and borrowings from GMAC at
June 30, 2007 was $39.3 billion, of which
$5.2 billion was classified as short-term or current
portion of long-term debt and $34.1 billion was classified
as long-term. At December 31, 2006, total debt was
$38.7 billion, of which $5.7 billion was short-term or
current portion of long-term debt and $33 billion was
long-term. This increase in total debt was primarily a result of
$1.5 billion convertible debenture issuance on May 31,2007 partly offset by $1.1 billion convertible debentures
that were put to GM and settled for cash on March 6, 2007.
GM funded this settlement using cash flow from operations and
available liquidity.
Short-term borrowing and current portion of long-term debt of
$5.1 billion includes $1.8 billion of debt issued by
GM’s subsidiaries and consolidated affiliates, and
$2.7 billion of related party debt, mainly dealer wholesale
floor plan financing from GMAC. GM has various debt maturities
other than current of $2.8 billion in 2008 and
$2.2 billion in 2009 and various debt maturities of
$29.8 billion thereafter. GM believes it has adequate
liquidity to settle those obligations as they become due.
In order to provide financial flexibility to GM and its
suppliers, GM maintains a trade payables program through GMAC
Commercial Finance (GMACCF). Under the terms of the GMAC
Transaction, GM will be permitted to continue administering the
program through GMACCF so long as GM provides the funding of
advance payments to suppliers under the program. As of
May 1, 2006, GM commenced funding of the advance payments,
and as a result, at June 30, 2007, there was no outstanding
balance owed by GM to GMACCF under the program.
Net
Liquidity
Net liquidity, calculated as cash, marketable securities, and
$3.6 billion ($2.5 billion at December 31,2006) of readily-available assets of the VEBA trust less
the short-term borrowings and long-term debt, was a negative
$12.1 billion at June 30, 2007, compared with a
negative $12.3 billion at December 31, 2006.
Financing
and Insurance Operations
Prior to the consummation of the GMAC Transaction, GMAC paid a
dividend to GM of lease-related assets, having a net book value
of $4 billion and related deferred tax liabilities of
$1.8 billion. This dividend resulted in the transfer to GM
of two bankruptcy-remote subsidiaries that hold equity interests
in ten trusts that own leased vehicles and issued asset-backed
securities collateralized by the vehicles. GMAC originated these
securitizations and
remains as the servicer of the securitizations. GM consolidates
the bankruptcy-remote subsidiaries and the ten trusts for
financial reporting purposes.
At June 30, 2007, GM had vehicles subject to operating
leases of $9.1 billion compared to $11.8 billion at
December 31, 2006, other net assets of $1.5 billion
compared to $1.5 billion at December 31, 2006,
outstanding secured debt of $7.1 billion compared to
$9.4 billion at December 31, 2006, and net equity of
$3.6 billion compared to $3.9 billion at
December 31, 2006 associated with these bankruptcy-remote
subsidiaries.
The decrease in operating leases, secured debt and net equity
from December 31, 2006 is the result of the termination of
some leases during the six months ended June 30, 2007 and
the repayment of the related secured debt. The secured debt has
recourse solely to the leased vehicles and related assets. GM
continues to be obligated to the bankruptcy-remote subsidiaries
for residual support payments on the leased vehicles in an
amount estimated to equal $1.3 billion at June 30,2007 (December 31, 2006 — $1.6 billion).
However, neither the securitization investors nor the trusts
have any rights to the residual support payments. GM expects the
operating leases and related securitization debt to gradually
amortize over the next three to four years resulting in the
release to these two bankruptcy-remote subsidiaries of certain
cash flows related to their ownership of the securitization
trusts and related operating leases.
The cash flow that GM expects to realize from the leased vehicle
securitizations over the next three to four years will come from
three principal sources. The first is cash released from the
securitizations on a monthly basis, as a result of available
funds exceeding debt service and other required payments in that
month. The second is cash received upon and following
termination of a securitization, to the extent of remaining
overcollateralization. The third is a return of the residual
support payments owing from GM each month. For the six months
ended June 30, 2007, the total cash flows released to these
two bankruptcy-remote subsidiaries was $418 million and
from November 2006 through June 30, 2007 the total cash
flows released was $536 million.
Status
of Debt Ratings
Dominion Bond Rating Services (DBRS), Fitch Ratings (Fitch),
Moody’s Investor Service (Moody’s), and
Standard & Poors (S&P) currently rate GM’s
credit at non-investment grade. The following table summarizes
GM’s credit ratings as of August 1, 2007:
Rating Agency
Senior Unsecured Debt
Outlook
Commercial Paper
DBRS
B
Negative
R-5
Fitch
B−
Negative
Withdrawn
Moody’s
Caa1
Negative
Not Prime
S&P
B−
Negative
B-3
On May 14, 2007, DBRS affirmed GM’s senior unsecured
debt rating at ‘B’ with ‘Negative’ trend. On
May 23, 2007, Fitch affirmed GM’s issuer default
rating at ‘B’ with ’Rating Watch Negative’
but downgraded GM’s senior unsecured debt rating to
‘B−’ from ‘B’. On July 12, 2007
Fitch affirmed GM’s issuer default rating at ‘B’
but removed it from ‘Rating Watch Negative’. On
June 7, 2007, S&P recalibrated its rating scale
resulting in an upgrade to GM’s secured credit rating to
‘BB−’ from ‘B+’. As of August 1,2007, GM’s secured credit is rated at ‘BB’ by
Fitch, ‘Ba3’ by Moody’s and ‘BB−’
by S&P. For the period January 1, 2007 through
August 1, 2007, DBRS and Moody’s have taken no ratings
action on GM’s unsecured or secured debt.
While the non-investment grade ratings identified above have
translated into higher borrowing costs and limited access to
unsecured debt markets, these outcomes have been mitigated by
actions taken by GM over the past few years to focus on
increased use of liquidity sources other than institutional
unsecured markets, which are not directly affected by ratings on
unsecured debt, including secured funding sources and conduit
facilities. Further reductions of GM’s credit ratings could
increase the possibility of additional terms and conditions
contained in any
new or replacement financing arrangements. As a result of
specific funding actions taken over the past few years,
management believes that GM will continue to have access to
sufficient capital to meet its ongoing funding needs over the
short and medium term. Notwithstanding the foregoing, management
believes that the current ratings situation and outlook increase
the level of risk for achieving GM’s funding strategy. In
addition, the ratings situation and outlook increase the
importance of successfully executing GM’s plans for
improvement of operating results.
Off-Balance
Sheet Arrangements
GM uses off-balance sheet arrangements where the economics and
sound business principles warrant their use. GM’s principal
use of off-balance sheet arrangements occurs in connection with
the securitization and sale of financial assets.
The financial assets sold by GM consist principally of trade
receivables that are part of a securitization program that GM
has participated in since 2004. As part of this program, GM
entered into an agreement to sell undivided interests in
eligible trade receivables up to $850 million in 2006 to a
bank conduit which funds its purchases through issuance of
commercial paper or via direct bank funding. The receivables
under the program were sold at fair market value and were
excluded from the consolidated balance sheets. The loss on the
trade receivables sold is included in Automotive cost of sales
and was $1.5 million and $8.3 million for the three
months ended June 30, 2007 and 2006, respectively. The
amount of receivables sold as of June 30, 2007,
December 31, 2006 and June 30, 2006 was
$25 million, $200 million and $587 million,
respectively. GM does not have a retained interest in the
receivables sold, but performs collection and administrative
functions. The gross amount of proceeds received from the sale
of receivables under this program was $.1 billion and
$3.2 billion for three months ended June 30, 2007 and
2006, respectively.
In addition to this securitization program, GM participates in
other trade receivable securitization programs, primarily in
Europe. Financing providers had a beneficial interest in
GM’s pool of eligible European receivables of
$.1 billion as of June 30, 2007, December 31,2006 and June 30, 2006, related to those securitization
programs.
GM leases real estate and equipment from various off-balance
sheet entities that have been established to facilitate the
financing of those assets for GM by nationally prominent lessors
that GM believes are creditworthy. These assets consist
principally of office buildings, warehouses, and machinery and
equipment. The use of such entities allows the parties providing
the financing to isolate particular assets in a single entity
and thereby syndicate the financing to multiple third parties.
This is a conventional financing technique used to lower the
cost of borrowing and, thus, the lease cost to a lessee such as
GM. There is a well-established market in which institutions
participate in the financing of such property through their
purchase of ownership interests in these entities, and each is
owned by institutions that are independent of, and not
affiliated with, GM. GM believes that no officers, directors, or
employees of GM, or their affiliates hold any direct or indirect
equity interests in such entities.
As of June 30, 2006, additional off-balance sheet trade
receivables sold to GMAC were $590 million.
Dividends
Dividends may be paid on our common stock when, as, and if
declared by GM’s board of directors in its sole discretion
out of amounts available for dividends under applicable law.
Under Delaware law, our board may declare dividends only to the
extent of our statutory “surplus” (i.e., total assets
minus total liabilities, in each case at fair market value,
minus statutory capital), or if there is no such surplus, out of
our net profits for the then current
and/or
immediately preceding fiscal year.
GM’s policy is to distribute dividends on its common stock
based on the outlook and indicated capital needs of the
business. Cash dividends per share on common stock were $1.00 in
2006, and $2.00 in 2005 and 2004. At the February 6, 2007
and May 1, 2007 meetings of the GM board of directors, the
board approved the payment of a $0.25 quarterly dividend on
GM’s common stock for the first and second quarters of
2007, respectively. Cash dividends per share of common stock
were $0.25 per quarter for 2006.
The number of employees for GMNA at June 30, 2007,
December 31, 2006, and June 30, 2006 excludes U.S.
hourly employees of 5,507, 3,620, and 4,234, respectively, who
are on a temporary leave of absence.
(2)
The number of employees at June 30, 2007 and
December 31, 2006 exclude GMAC employees, who were removed
from the consolidated payroll as a result of the GMAC
Transaction in November 2006.
The Condensed Consolidated Financial Statements of GM are
prepared in conformity with generally accepted accounting
principles, which requires the use of estimates, judgments, and
assumptions that affect the reported assets and liabilities as
of the financial statements dates and the reported revenues and
expenses for the periods presented. GM’s accounting
policies and critical accounting estimates are consistent with
those described in Note 3 to the Consolidated Financial
Statements and the Management’s Discussion and Analysis
section in our 2006
Form 10-K.
Management believes that the accounting estimates employed are
appropriate and resulting balances are reasonable; however,
actual results could differ from the original estimates,
requiring adjustments to these balances in future periods.
Management has discussed the development, selection and
disclosures of its critical accounting estimates with the Audit
Committee of GM’s Board of Directors, and the Audit
Committee has reviewed the disclosures relating to these
estimates.
Accounting
Standards Not Yet Adopted
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurement” (SFAS No. 157),
which provides a definition of fair value, establishes a
framework for measuring fair value and requires expanded
disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The provisions of
SFAS No. 157 are to be applied prospectively.
Management is currently assessing the potential impact of the
standard on GM’s financial condition and results of
operations.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities — Including an Amendment of
SFAS No. 115” (SFAS No. 159), which
permits an entity to measure certain financial assets and
financial liabilities at fair value that are not currently
required to be measured at fair value. Entities that elect the
fair value option will report unrealized gains and losses in
earnings at each subsequent reporting date. The fair value
option may be elected on an
instrument-by-instrument
basis, with a few exceptions. SFAS No. 159 amends
previous guidance to extend the use of the fair value option to
available-for-sale and held-to-maturity securities. The
statement also establishes presentation and disclosure
requirements to help financial statement users understand the
effect of the election. SFAS No. 159 is effective as
of the beginning of the first fiscal year beginning after
November 15, 2007. Management is currently assessing the
potential impact of the standard on GM’s financial
condition and results of operations.
In June 2007, the FASB ratified the consensus in EITF Issue
No. 07-3
“Accounting for Nonrefundable Payments for Goods or
Services to Be Used in Future Research and Development
Activities”, requiring that nonrefundable advance payments
for future research and development activities be deferred and
capitalized. Such amounts should be expensed as the related
goods are delivered or the related services are performed. The
statement is effective for fiscal years beginning after
December 15, 2007. Management is currently assessing the
potential impact of the standard on GM’s financial
condition and results of operations.
In June 2007, the FASB ratified EITF Issue
No. 06-11
“Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards”
(EITF 06-11),
which requires entities to record tax benefits on dividends or
dividend equivalents that are charged to retained earnings for
certain share-based awards to additional paid-in capital. In a
share-based payment arrangement, employees may receive dividends
or dividend equivalents on awards of nonvested equity shares,
nonvested equity share units during the vesting period, and
share options until the exercise date. Generally, the payment of
such dividends can be treated as deductible compensation for tax
purposes. The amount of tax benefits recognized in additional
paid-in capital should be included in the pool of excess tax
benefits available to absorb tax deficiencies on share-based
payment awards.
EITF 06-11
is effective for
Accounting
Standards Not Yet
Adopted — (concluded)
fiscal years beginning after December 15, 2007, and interim
periods within those years. Management does not expect this
guidance to have a material effect on GM’s financial
condition and results of operations.
Forward-Looking
Statements
In this report and in reports subsequently filed by GM with the
SEC on
Form 10-K
and filed or furnished on
Form 8-K,
and in related comments by management of GM, our use of the
words “expect,”“anticipate,”“estimate,”“forecast,”“initiative,”“objective,”“plan,”“goal,”“project,”“outlook,”“priorities,”“target,”“intend,”“evaluate,”“pursue,”“seek,”“may,”“would,”“could,”“should,”“believe,”“potential,”“continue,”“designed,”“impact,”
or the negative of any of those words or similar expressions is
intended to identify forward-looking statements that represent
our current judgment about possible future events. All
statements in this report and subsequent reports which GM may
file with the SEC on
Form 10-Q
or file or furnish on
Form 8-K,
other than statements of historical fact, including without
limitation, statements about future events and financial
performance, are forward-looking statements that involve certain
risks and uncertainties. We believe these judgments are
reasonable, but these statements are not guarantees of any
events or financial results, and GM’s actual results may
differ materially due to a variety of important factors that may
be revised or supplemented in subsequent reports on SEC
Forms 10-K,
10-Q, and
8-K. Such
factors include, among others, the following:
•
The ability of GM to realize production efficiencies, to achieve
reductions in costs as a result of the turnaround restructuring
and health care cost reductions and to implement capital
expenditures at levels and times planned by management;
•
The pace of product introductions;
•
Market acceptance of the Corporation’s new products;
•
Significant changes in the competitive environment and the
effect of competition in the Corporation’s markets,
including on the Corporation’s pricing policies;
•
Our ability to maintain adequate liquidity and financing sources
and an appropriate level of debt;
•
Changes in the existing, or the adoption of new, laws,
regulations, policies, or other activities of governments,
agencies, and similar organizations where such actions may
affect the production, licensing, distribution, or sale of our
products, the cost thereof or applicable tax rates;
•
Costs and risks associated with litigation;
•
The final results of investigations and inquiries by the SEC and
other governmental agencies;
•
Changes in our accounting principles, or their application or
interpretation, and our ability to make estimates and the
assumptions underlying the estimates, including the range of
estimates for the Delphi pension benefit guarantees, which could
result in an impact on earnings;
•
Changes in relations with unions and employees/retirees and the
legal interpretations of the agreements with those unions with
regard to employees/retirees, including the negotiation of a new
collective bargaining agreement with the UAW;
•
Negotiations and bankruptcy court actions with respect to
Delphi’s obligations to GM, negotiations with respect to
GM’s obligations under the pension benefit guarantees to
Delphi employees, and GM’s ability to recover any indemnity
claims against Delphi;
•
Labor strikes or work stoppages at GM or its key suppliers such
as Delphi or financial difficulties at GM’s key suppliers
such as Delphi;
•
Additional credit rating downgrades and the effects thereof;
Changes in economic conditions, commodity prices, currency
exchange rates, or political stability in the markets in which
we operate.
In addition, GMAC’s actual results may differ materially
due to numerous important factors that are described in
GMAC’s most recent report on SEC
Form 10-K,
which may be revised or supplemented in subsequent reports on
SEC
Forms 10-K,
10-Q, and
8-K. Such
factors include, among others, the following:
•
Changes in the residential mortgage market, especially in the
nonprime sector;
•
Significant changes in the competitive environment and the
effect of competition in the GMAC’s markets, including on
the GMAC’s pricing policies;
•
Its ability to maintain adequate financing sources;
•
Its ability to maintain an appropriate level of debt;
•
Restrictions on the ability of GMAC’s residential mortgage
subsidiary to pay dividends and prepay subordinated debt
obligations to GMAC;
•
Changes in the residual value of off-lease vehicles;
•
Changes in U.S. government-sponsored mortgage programs or
disruptions in the markets in which GMAC’s mortgage
subsidiaries operate;
•
Changes in its contractual servicing rights;
•
Costs and risks associated with litigation;
•
Changes in GMAC’s accounting assumptions that may require
or that result from changes in the accounting rules or their
application, which could result in an impact on earnings;
•
Changes in the credit ratings of GMAC or GM;
•
The threat of natural calamities;
•
Changes in economic conditions, currency exchange rates, or
political stability in the markets in which it operates; and
•
Changes in the existing, or the adoption of new, laws,
regulations, policies, or other activities of governments,
agencies and similar organizations.
We caution investors 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
such factors that affect the subject of these statements, except
where we are expressly required to do so by law.
* * * * * *
Item 3.
Quantitative
And Qualitative Disclosures About Market Risk
There have been no significant changes in the Corporation’s
exposure to market risk since December 31, 2006. Refer to
Item 7A in GM’s 2006 Annual Report on
Form 10-K.
GM maintains disclosure controls and procedures designed to
ensure that information required to be disclosed in reports
filed under the Securities Exchange Act of 1934, as amended
(Exchange Act), is recorded, processed, summarized, and reported
within the specified time periods and accumulated and
communicated to GM’s management, including its principal
executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
GM’s management, with the participation of its Chairman and
Chief Executive Officer (CEO) and its Vice Chairman and Chief
Financial Officer (CFO), evaluated the effectiveness of our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
or 15d-15(e)
promulgated under the Exchange Act as of June 30, 2007.
Based on that evaluation, GM’s CEO and CFO concluded that,
as of that date, GM’s disclosure controls and procedures
required by paragraph (b) of Exchange Act
Rules 13a-15
or 15d-15
were not effective at the reasonable assurance level because of
the identification of material weaknesses in our internal
control over financial reporting, which we view as an integral
part of our disclosure controls and procedures.
As discussed in GM’s Annual Report on
Form 10-K
for the year ended December 31, 2006, management’s
assessment identified the following material weaknesses:
1. The Corporation lacked the technical expertise and
processes to ensure compliance with SFAS No. 109,
“Accounting for Income Taxes”
(SFAS No. 109), and did not maintain adequate
controls with respect to (1) timely tax account
reconciliations and analyses, (2) coordination and
communication between Corporate Accounting and Tax Staffs, and
(3) timely review and analysis of corporate journals
recorded in the consolidation process. This material weakness
resulted in a restatement of prior financial statements, as
described in Note 15 to the Condensed Consolidated
Financial Statements, and, if not remediated, has the potential
to cause a material misstatement in the future.
2. The Corporation in certain instances lacked the
technical expertise and did not maintain adequate procedures to
ensure that the accounting for derivative financial instruments
under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”
(SFAS No. 133), was appropriate. Procedures relating
to hedging transactions in certain instances did not operate
effectively to (1) properly evaluate hedge accounting
treatment (2) meet the documentation requirements of
SFAS No. 133, (3) adequately assess and measure
hedge effectiveness on a quarterly basis, and (4) establish
the appropriate communication and coordination between relevant
GM departments involved in complex financial transactions. This
material weakness resulted in a restatement of prior financial
statements, as described in Note 15 to the Condensed
Consolidated Financial Statements and, if not remediated, has
the potential to cause a material misstatement in the future.
3. The Corporation did not maintain a sufficient complement
of personnel with an appropriate level of technical accounting
knowledge, experience, and training in the application of
generally accepted accounting principles commensurate with the
Corporation’s complex financial accounting and reporting
requirements and low materiality thresholds. This was evidenced
by a significant number of out-of-period adjustments noted
during the year-end closing process. This material weakness
contributed to the restatement of prior financial statements, as
described in Note 15 to the Condensed Consolidated
Financial Statements and, if not remediated, has the potential
to cause a material misstatement in the future.
4. Due to the previously reported material weaknesses, as
evidenced by the significant number and magnitude of
out-of-period adjustments identified during the year-end closing
process and the resulting restatements related to deferred taxes
and hedging activities, management has concluded that the
controls over the period-end financial reporting process were
not operating effectively. Specifically, controls were not
effective to ensure that significant non-routine transactions,
accounting estimates, and other adjustments were appropriately
reviewed, analyzed, and monitored on a timely basis. A material
weakness in the period-end financial reporting process could
result in the Corporation not being able to meet its regulatory
filing deadlines and, if not remediated, has the potential to
cause a material misstatement or to miss a filing deadline in
the future.
The Corporation is in the process of developing and implementing
remediation plans to address our material weaknesses. During the
first half of 2007, management conducted a program to plan the
remediation of all identified material weaknesses and
significant deficiencies using a risk-based approach based on
the “Internal Control — Integrated
Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). These plans
contemplate various changes in process, procedures, policy,
training and organizational design, and are currently being
implemented. In addition, new senior managers have been
appointed to key positions in the accounting area and 35
accounting professionals have been engaged from external
resources to address internal control weakness in technical
accounting. The tax accounting group has been reorganized under
the Tax Staff, headed by a new Director of Global Tax Accounting.
The following specific remedial actions are in process for each
of the material weaknesses described above:
1. Reorganize and restructure the Tax Department by
(1) implementing new policies and procedures to ensure that
tax account reconciliations and analyses are properly prepared
and monitored on a timely basis, (2) establishing
appropriate communication and collaboration protocols between
the Tax Staff and Corporate Accounting group, and
(3) hiring the necessary technical tax accounting personnel
to support GM’s complex tax environment.
2. Implement additional policies, procedures, and
documentation retention requirements for hedge accounting to
ensure compliance with SFAS No. 133. Contract with
outside SFAS No. 133 experts in the interim until the
necessary technical accounting personnel have been hired to
support GM’s complex hedge accounting activities.
3. Reorganize and restructure Corporate Accounting by
(1) revising the reporting structure and establishing clear
roles, responsibilities, and accountability, (2) hiring
additional technical accounting personnel to address GM’s
complex accounting and financial reporting requirements, and
(3) assessing the technical accounting capabilities in the
operating units to ensure the right complement of knowledge,
skills, and training.
4. Improve period-end closing procedures by
(1) requiring all significant non-routine transactions to
be reviewed by Corporate Accounting, (2) ensuring that
account reconciliations and analyses for significant financial
statement accounts are reviewed for completeness and accuracy by
qualified accounting personnel, (3) implementing a process
that ensures the timely review and approval of complex
accounting estimates by qualified accounting personnel and
subject matter experts, where appropriate, and
(4) developing better monitoring controls at Corporate
Accounting and the operating units.
As previously noted, management has augmented the resources in
Corporate Accounting by utilizing external resources in
technical accounting areas and implemented additional closing
procedures during 2007. As a result, management believes that
there are no material inaccuracies or omissions of material fact
and, to the best of its knowledge, believes that the Condensed
Consolidated Financial Statements for the three and six months
ended June 30, 2007, fairly present in all material
respects the financial condition and results of operations of
the Corporation in conformity with accounting principles
generally accepted in the United States of America.
As discussed in GM’s Annual Report on
Form 10-K
for the year ended December 31, 2005, GM management also
identified a significant deficiency in internal controls related
to accounting for complex contracts. As part of its remediation
efforts, GM management issued procedural guidance to ensure
review and evaluation of the appropriate accounting for complex
contracts by experienced accounting personnel. GM management
will continue to monitor the effectiveness of the remedial
actions.
Other than as described above, there have not been any other
changes in the Corporation’s internal control over
financial reporting during the three and six months ended
June 30, 2007, which have materially affected, or are
reasonably likely to materially affect, the Corporation’s
internal control over financial reporting.
Our management, including our CEO and CFO, does not expect that
our disclosure controls or our internal controls will prevent or
detect all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives
will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within GM have
been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls
is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree
of compliance with associated policies or procedures. Because of
the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected.
* * * * * *
PART II
Item 1.
Legal
Proceedings
Canadian
Export Antitrust Class Action
In the previously reported antitrust class action consolidated
in the U.S. District Co41urt for the District of Maine,
In re New Market Vehicle Canadian Export Antitrust Litigation
Cases, the court ruled on March 21, 2007 that it will
certify 20 separate statewide class actions for damages under
various state law theories under Federal Rule 23(b)(3),
covering the period from January 1, 2001 to April 30,2003. General Motors has appealed the certification of the
damages classes following the entry of the class certification
order and anticipates that its appeal will be consolidated with
its pending appeal of a prior order certifying a nationwide
class for injunctive relief only.
ERISA
Case
On April 12, 2007, a purported class action lawsuit was
filed in the U.S. District Court for the Southern District
of New York captioned Mary M. Brewer, et al. v. General
Motors Investment Management Corporation, et al. The case
was brought by a plaintiff who alleges that she is a participant
in the Delphi Savings-Stock Purchase Program for Salaried
Employees and purports to bring claims on behalf of all
participants in that plan as well as participants in the Delphi
Personal Savings Plan for Hourly-Rate Employees; the ASEC
Manufacturing Savings Plan and the Delphi Mechatronic Systems
Savings-Stock Purchase Program against General Motors Investment
Management Corporation (GMIMCo) and State Street Bank (State
Street). The complaint alleges that GMIMCo and State Street
breached their fiduciary duties to plan participants by allowing
participants to invest in five different funds that each held
primarily the equity of a single company: the EDS Fund, the
DIRECTV Fund, the News Corp. Fund, the Raytheon Fund, and the GM
Common Stock Fund, all of which plaintiffs allege were imprudent
investments because of their inherent risk and poor performance
relative to more prudent investment alternatives. The complaint
also alleges that GMIMCo breached its fiduciary duties to plan
participants by allowing participants to invest in mutual funds
offered by FMR Corp. under the Fidelity brand name. Plaintiffs
allege that by investing in these funds, participants paid
excessive fees and costs that they would not have incurred had
they invested in more prudent investment alternatives. The
complaint seeks a declaration that defendants have breached
their fiduciary duties, an order requiring defendants to
compensate the plans for their losses resulting from their
breaches of fiduciary duties,
the removal of defendants as fiduciaries, an injunction against
further breaches of fiduciary duties, other unspecified
equitable and monetary relief, and attorneys fees and costs. No
determination has been made that the case may be maintained as a
class action.
Environmental
Matters
Linden,
New Jersey Assembly Plan
GM has entered into a settlement agreement with the New Jersey
Department of Environmental Protection and the Administrator of
the New Jersey Spill Compensation Fund under which GM will pay
$121,752, plus the Department’s assessment costs, to settle
the Department’s allegations related to ground water
contamination resulting from discharges at the site of a GM
assembly plant in Linden, New Jersey. EPA Region II
withdrew its previously reported administrative complaint
against the Linden assembly plant without prejudice pending a
final resolution of a previously reported EPA Region V
Administrative Complaint, which is expected some time in 2007.
Greenhouse
Gas Lawsuit
In the previously reported tort case, California ex rel.
Lockyer v. General Motors Corporation, et al., the
United States District Court for the Northern District of
California heard oral argument on defendants’ motion to
dismiss on March 6, 2007; a ruling has not been issued.
Following the U.S. Supreme Court’s decision on
April 2, 2007 in Massachusetts v. EPA, the
parties in Lockyer submitted supplemental briefs
commenting on the significance of the decision to the pending
motion for dismissal.
* * * * * *
Item 1A.
Risk
Factors
The following risk factors, which were disclosed in the 2006
Form 10-K,
have been modified to provide additional disclosure related to
changes since we filed the 2006
Form 10-K
and the First Quarter 2007
Form 10-Q.
Refer to the 2006
Form 10-K
and the First Quarter 2007
Form 10-Q
for an expanded discussion of other risks facing the Corporation
listed below under the caption “Other Risk Factors.”
Risks
related to GM and its automotive business
Changes
in existing, or the adoption of new, laws, regulations or
policies of governmental organizations, particularly
environmental or fuel economy regulations, may have a
significant negative impact on how we do business.
We are affected significantly by a substantial amount of
governmental regulations, which are expensive to comply with and
anticipated to increase. In the United States and Europe, for
example, governmental regulation is primarily driven by concerns
about the environment, vehicle safety, and fuel economy. These
government regulatory requirements complicate our plans for
global product development and can result in substantial costs,
which can be difficult to pass through to our customers.
The Corporate Average Fuel Economy (CAFE) requirements mandated
by the U.S. government pose special concerns. In June 2007,
the U.S. Senate approved an energy bill that would
significantly increase CAFE requirements to a combined standard
for cars and trucks of 35 miles per gallons by 2020, a 40%
increase. The estimated cost to the automotive industry of
compliance with this new standard would exceed
$100 billion, and GM’s compliance cost could require
us to alter our capital spending and research and development
plans, curtail sales of our higher margin vehicles, cease
production of certain models, or even exit certain segments of
the vehicle market. Proposals that would result in dramatically
higher standards could disrupt our future product plans in ways
that would significantly and adversely affect our sales volume,
revenue, and profitability in the United States and could result
in plant closures and job losses. We anticipate that the
U.S. House of Representatives will soon consider
Risks
related to GM and its automotive
business — (continued)
energy legislation that would impose similarly aggressive CAFE
standards. In addition, a growing number of states have adopted
regulations that establish
CO2
emission standards that effectively impose similarly heightened
fuel economy standards for new vehicles sold in those states.
Although the automotive industry is challenging certain of these
state regulations in court, no assurance can be given that these
challenges will be successful.
In addition to fuel economy standards, GM products must satisfy
legal safety requirements. Meeting or exceeding
government-mandated safety standards is difficult and costly,
because crashworthiness standards tend to conflict with the need
to reduce vehicle weight in order to meet emissions and fuel
economy standards. While GM is managing its product development
and production operations on a global basis to reduce costs and
lead times, unique national or regional standards or vehicle
rating programs can result in additional costs for product
development, testing, and manufacturing. Governments often
require the implementation of new requirements during the middle
of a product cycle, which can be substantially more expensive
than accommodating these requirements during the design of a new
product.
Shortages
and increases in the price of fuel can result in diminished
profitability due to shifts in consumer vehicle
demand.
High gasoline prices in 2006 and the first half of 2007
contributed to weaker demand for certain of our higher margin
vehicles, especially our fullsize sport utility vehicles, as
consumer demand shifted to smaller, more fuel-efficient
vehicles, which provide lower profit margins and generally
represent a smaller proportion of our sales volume in North
America. Fullsize pickup trucks, which are generally less fuel
efficient than smaller vehicles, provided more than 27% of
GM’s retail sales in the first half of 2007, compared to a
total industry average of approximately 13% (approximately 14%
of industry retail sales). Any future increases in the price of
gasoline in the United States or in our other markets or any
sustained shortage of fuel could weaken further the demand for
such vehicles. Such a result could lower profitability and have
a material adverse effect on our business.
Our
collective bargaining agreement with the UAW will expire in
September 2007, and we intend to negotiate a new agreement that
promotes our cost reduction goals.
Substantially all of the hourly employees in our U.S., Canadian,
and European automotive operations are represented by labor
unions and are covered by collective bargaining agreements,
which usually have a multi-year duration. Many of these
agreements include provisions that limit our ability to realize
cost savings from restructuring initiatives such as plant
closings and reductions in workforce.
Our current collective bargaining agreement with the UAW will
expire in September 2007, and we intend to pursue our cost
reduction goals vigorously in negotiating the new agreement. The
UAW agreements of the other major U.S. vehicle
manufacturers, Ford Motor Company and Chrysler LLC will expire
at the same time, and the UAW generally chooses to negotiate a
new agreement with one manufacturer that it selects to establish
a pattern for agreements with the other two manufacturers. We do
not have any influence over which manufacturer may be selected
for this pattern bargaining, and if a pattern agreement is
established with a different manufacturer, the terms of such an
agreement may be disadvantageous to GM. Any UAW strikes, threats
of strikes, or other disruption in connection with the
negotiation of a new agreement could materially adversely affect
our business as well as impair our ability to implement further
measures to reduce structural costs and improve production
efficiencies in furtherance of our North American initiatives. A
lengthy strike by the UAW that involves all or a significant
portion of our manufacturing facilities in the United States
would have a material adverse effect on our operations and
financial condition and result in unusually large demands on our
liquidity.
Risks
related to GM and its automotive
business — (continued)
The
proposed consensual resolution of Delphi’s bankruptcy
proceedings may be contested by other parties or rejected by the
Bankruptcy Court.
Delphi has announced a number of arrangements that could serve
as the basis of a consensual resolution of its bankruptcy
proceedings, including the UAW MOU with GM and an equity
purchase proposal from an investor group, and Delphi’s
Statutory Committees and GM have indicated their support for a
plan of reorganization that carries out such arrangements. These
arrangements have not been fully negotiated and documented in
definitive agreements. Therefore, issues may arise that the
parties cannot resolve or that are resolved in ways that
increase GM’s obligations or decrease the benefits GM would
receive from a resolution of Delphi’s bankruptcy
proceedings. In addition, parties excluded from the investor
group, or other entities negatively affected by the proposed
consensual resolution, may oppose the proposed plan of
reorganization in whole or request changes that would have a
negative effect on GM’s position. Finally, the Bankruptcy
Court may delay its decision or refuse to approve the plan of
reorganization, which could result in uncertainty that affects
our bargaining with the UAW as well as our ability to plan
future production.
Other
Risk Factors
The following risk factors, which were disclosed in the 2006
Form 10-K,
have not materially changed since we filed the 2006
Form 10-K.
Refer to the 2006
Form 10-K
for a complete discussion of these risk factors.
Risks
related to GM and its automotive business
•
Our continued ability to achieve structural and material cost
reductions and to realize production efficiencies for our
automotive operations is critical to our ability to achieve our
turnaround plan and return to profitability.
•
We must continue to make structural changes to reduce our
U.S. health-care cost burden, the source of our largest
competitive cost disadvantage.
•
Our extensive pension and OPEB obligations to retirees are a
competitive disadvantage for us.
•
Our pension and OPEB expenses are affected by factors outside
our control, including the performance of plan assets, interest
rates, actuarial data and experience, and changes in laws and
regulations.
•
We have guaranteed a significant amount of Delphi’s
financial obligations to its unionized workers. If Delphi fails
to satisfy these obligations, we would be obligated to pay some
of these obligations.
•
Delphi may seek to reject or compromise its obligations to us
through its Chapter 11 bankruptcy proceedings.
•
Financial difficulties, labor stoppages, or work slowdowns at
key suppliers, including Delphi, could result in a disruption in
our operations and have a material adverse effect on our
business.
•
Increase in cost, disruption of supply, or shortage of raw
materials could harm our business.
•
A decline in consumer demand for our higher margin vehicles
could result in diminished profitability.
•
The pace of introduction and market acceptance of new vehicles
is important to our success.
•
Decreases in the residual value of our vehicles could have a
significant negative effect on our results of operations.
•
GM’s significant investment in new technology may not
result in successful vehicle applications.
•
We operate in a highly competitive industry that has excess
manufacturing capacity.
Risks
related to GM and its automotive
business — (concluded)
•
The financial distress, bankruptcy, or insolvency of a major
competitor could have significant adverse consequences for us.
•
We could be materially adversely affected by changes or
imbalances in currency exchange or other rates.
•
Our liquidity position could be negatively affected by a variety
of factors, which in turn could have a material adverse effect
on our business.
•
Continued failure to achieve profitability may cause some or all
of our deferred tax assets to expire.
•
Further reduction of our credit ratings, or failure to restore
our credit ratings to higher levels, could have a material
adverse effect on our business.
•
The federal government is currently investigating certain of our
accounting practices. The final outcome of these investigations
could require us to restate prior financial results.
•
We have determined that our internal controls over financial
reporting are currently ineffective. The lack of effective
internal controls could adversely affect our financial condition
and ability to carry out our strategic business plan.
•
Our indebtedness and other obligations of our automotive
operations are significant and could materially adversely affect
our business.
•
Economic and industry conditions constantly change and could
have a material adverse effect on our business and results of
operations.
•
Our businesses outside the United States expose us to additional
risks that may cause our revenues and profitability to decline.
•
We are subject to significant risks of litigation.
Risks
related to GM’s 49% ownership interest in GMAC
•
General business, economic, and market conditions may
significantly affect the operating results of GMAC’s
business and earnings.
•
GMAC requires substantial capital, and if GMAC is unable to
maintain adequate financing sources, its profitability and
financial condition will suffer and jeopardize its ability to
continue operations.
•
GMAC’s indebtedness and other obligations are significant
and could materially adversely affect its business.
•
GMAC’s earnings may decrease because of increases or
decreases in interest rates.
•
GMAC’s hedging strategies may not be successful in
mitigating its risks associated with changes in interest rates
and could affect its profitability and financial condition.
•
GMAC’s residential mortgage subsidiary’s ability to
pay dividends to GMAC is restricted by contractual arrangements.
•
GMAC uses estimates and assumptions in determining the fair
value of certain of its assets, its allowance for credit losses,
lease residual values, and its reserves for insurance losses and
loss adjustment expenses. If its estimates or assumptions prove
to be incorrect, its cash flow, profitability, financial
condition, and business prospects would be materially adversely
affected.
•
GMAC is exposed to credit risk which could affect its
profitability and financial condition.
Risks
related to GM’s 49% ownership interest in
GMAC — (concluded)
•
Recent developments in the residential mortgage market,
especially in the nonprime sector, may adversely affect
GMAC’s revenues, profitability, and financial condition.
•
Changes in existing U.S. government-sponsored mortgage
programs, or disruptions in the secondary markets in the United
States or other countries in which GMAC’s mortgage
subsidiaries operate, could adversely affect the profitability
and financial condition of GMAC’s mortgage business.
•
GMAC may be required to repurchase contracts and provide
indemnification if it breaches representations and warranties in
its securitization and whole loan transactions, which could harm
GMAC’s profitability and financial condition.
•
Significant indemnification payments or contract, lease, or loan
repurchase activity of retail contracts or leases or mortgage
loans could harm GMAC’s profitability and financial
condition.
•
A loss of contractual servicing rights could have a material
adverse effect on GMAC’s financial condition, liquidity,
and results of operations.
•
The regulatory environment in which GMAC operates could have a
material adverse effect on its business and earnings.
•
The worldwide financial services industry is highly competitive.
If GMAC is unable to compete successfully or if there is
increased competition in the automotive financing, mortgage,
and/or
insurance markets or generally in the markets for
securitizations or asset sales, GMAC’s margins could be
materially adversely affected.
* * * * * * * *
Item 2(c).
Purchases
of Equity Securities
GM made no purchases of its common stock during the three months
ended June 30, 2007.
Submission
of Matters to a Vote of Security Holders
The General Motors Corporation’s annual meeting of
stockholders was held on June 5, 2007. At that meeting, the
following matters were submitted to a vote of the stockholders:
Final Voting Results
Votes
Percent
Item No. 1
Nomination and election of
directors
The following nominees for
directors received the number of votes set opposite their
respective names and were elected to serve on the Board of
Directors:
Submission
of Matters to a Vote of Security
Holders — (continued)
Final Voting Results
Votes
Percent
John H. Bryan
For
435,142,072
93.5
Withheld
30,237,666
6.5
Armando M. Codina
For
443,605,563
95.3
Withheld
21,774,175
4.7
Erroll B. Davis, Jr.
For
446,046,597
95.8
Withheld
19,333,141
4.2
George M.C. Fisher
For
439,049,013
94.3
Withheld
26,330,725
5.7
Karen Katen
For
440,038,288
94.6
Withheld
25,341,450
5.4
Kent Kresa
For
423,537,045
91.0
Withheld
41,842,693
9.0
Ellen J. Kullman
For
424,031,880
91.1
Withheld
41,347,858
8.9
Philip A. Laskawy
For
423,449,025
91.0
Withheld
41,930,713
9.0
Kathryn V. Marinello
For
446,769,015
96.0
Withheld
18,610,723
4.0
Eckhard Pfeiffer
For
419,894,212
90.2
Withheld
45,485,526
9.8
G. Richard Wagoner, Jr.
For
446,201,778
95.9
Withheld
19,177,960
4.1
In addition, 676 votes were cast
for each of the following: John Chevedden, James Dollinger, Lucy
Kessler, John Lauve, Louis Lauve III, Steve Mahac, Erik Nielsen,
Larry Parks, Danny Taylor, William Walde, and William
Woodward, M.D.; and 476 votes were cast for Dean Fitzpatrick
0.0
Item No. 2
Ratification of the selection of
Deloitte & Touche LLP as independent public
accountants for the year 2007
UAW-Delphi-GM Memorandum of
Understanding — Delphi Restructuring
10
.2
Asset Purchase Agreement dated as
of June 28, 2007 by and between General Motors Corporation
and Clutch Operating Company, Inc.
10
.3
General Motors Corporation 2007
Cash-Based Restricted Stock Unit Plan (Amendment to 2006
Cash-Based Restricted Stock Unit Plan)
10
.4
Form of Special RSU Grant award
document for March 2007 award
10
.5
Form of Special Cash-based RSU
Grant award document for March 2007 award
10
.6
364-Day
Revolving Credit Agreement Among General Motors Corporation, the
Several Lenders, Bank of America, N.A. as Syndication Agent, and
JPMorgan Chase Bank, N.A. as Administrative Agent dated as of
June 22, 2007
31
.1
Section 302 Certification of
the Chief Executive Officer
31
.2
Section 302 Certification of
the Chief Financial Officer
32
.1
Certification of the Chief
Executive Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32
.2
Certification of the Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
GENERAL MOTORS CORPORATION
(Registrant)
By:
/s/ NICK
S. CYPRUS
(Nick S. Cyprus, Controller and Chief Accounting Officer)
UAW-Delphi-GM Memorandum of
Understanding — Delphi Restructuring
10
.2
Asset Purchase Agreement dated as
of June 28, 2007 by and between General Motors Corporation
and Clutch Operating Company, Inc.
10
.3
General Motors Corporation 2007
Cash-Based Restricted Stock Unit Plan (Amendment to 2006
Cash-Based Restricted Stock Unit Plan)
10
.4
Form of Special RSU Grant award
document for March 2007 award
10
.5
Form of Special Cash-based RSU
Grant award document for March 2007 award
10
.6
364-Day
Revolving Credit Agreement Among General Motors Corporation, the
Several Lenders, Bank of America, N.A. as Syndication Agent, and
JPMorgan Chase Bank, N.A. as Administrative Agent dated as of
June 22, 2007
31
.1
Section 302 Certification of
the Chief Executive Officer
31
.2
Section 302 Certification of
the Chief Financial Officer
32
.1
Certification of the Chief
Executive Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32
.2
Certification of the Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
98
Dates Referenced Herein and Documents Incorporated by Reference