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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 “large accelerated
filer,”“accelerated filer” and “smaller
reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ
Accelerated
filer o
Non-accelerated
filer o
(Do not check if a smaller reporting company)
Smaller reporting
company 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, 2008, the number of shares outstanding of
the Registrant’s common stock was 566,162,606 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.
Equity in net assets of nonconsolidated affiliates
2,367
1,919
2,000
Property, net
44,038
43,017
41,404
Goodwill and intangible assets, net
1,070
1,066
973
Deferred income taxes
1,014
2,116
32,449
Prepaid pension
17,991
20,175
18,305
Other assets
3,648
3,466
3,577
Total non-current assets
70,128
71,759
98,708
Total Assets
$
136,046
$
148,883
$
186,639
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable (principally trade)
$
30,097
$
29,439
$
30,742
Short-term borrowings and current portion of long-term debt
8,008
6,047
5,150
Liabilities related to assets held for sale
—
—
526
Accrued expenses
37,373
34,822
34,621
Total current liabilities
75,478
70,308
71,039
Financing and Insurance Operations Liabilities
Debt
2,753
4,908
7,133
Other liabilities and deferred income taxes
884
905
855
Total Financing and Insurance Operations liabilities
3,637
5,813
7,988
Non-Current Liabilities
Long-term debt
32,450
33,384
34,134
Postretirement benefits other than pensions
47,476
47,375
48,353
Pensions
11,774
11,381
11,654
Other liabilities and deferred income taxes
20,825
16,102
15,972
Total non-current liabilities
112,525
108,242
110,113
Total liabilities
191,640
184,363
189,140
Commitments and contingencies (Note 9)
Minority interests
1,376
1,614
1,268
Stockholders’ Deficit
Preferred stock, no par value, 6,000,000 shares authorized,
no shares issued and outstanding
—
—
—
Common stock,
$12/3
par value (2,000,000,000 shares authorized, 756,637,541 and
566,162,598 shares issued and outstanding as of
June 30, 2008, respectively, 756,637,541 and
566,059,249 shares issued and outstanding as of
December 31, 2007, respectively, and 756,637,541 and
565,864,695 shares issued and outstanding as of
June 30, 2007, respectively)
944
943
943
Capital surplus (principally additional paid-in capital)
15,335
15,319
15,255
Retained earnings (accumulated deficit)
(58,470
)
(39,392
)
577
Accumulated other comprehensive loss
(14,779
)
(13,964
)
(20,544
)
Total stockholders’ deficit
(56,970
)
(37,094
)
(3,769
)
Total Liabilities, Minority Interests and Stockholders’
Deficit
$
136,046
$
148,883
$
186,639
Reference should be made to the notes to the condensed
consolidated financial statements.
We (also General Motors Corporation, GM or the Corporation) are
primarily engaged in the worldwide production and marketing of
cars and trucks. We operate in two businesses, consisting of
Automotive (GM Automotive or GMA) and Financing and Insurance
Operations (FIO). We develop, manufacture and market vehicles
worldwide through our four automotive segments which consist of
GM North America (GMNA), GM Europe (GME), GM Latin
America/Africa/Mid-East (GMLAAM) and GM Asia Pacific (GMAP). Our
finance and insurance operations are primarily conducted through
our 49% equity interest in GMAC LLC (GMAC), which is accounted
for under the equity method of accounting. 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.
Note 2. Basis
of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared pursuant to the rules and
regulations of the United States 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 our
opinion, these condensed consolidated financial statements
include all adjustments, consisting of only normal recurring
items, considered necessary for a fair presentation of our
financial position and results of operations. 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 our Annual
Report on
Form 10-K
for the year ended December 31, 2007 (2007
10-K) as
filed with the SEC.
The condensed consolidated financial statements include our
accounts and those of our subsidiaries that we control due to
ownership of a majority voting interest. In addition, we
consolidate variable interest entities for which we are the
primary beneficiary. Our share of earnings or losses of
nonconsolidated affiliates are included in our consolidated
operating results using the equity method of accounting when we
are able to exercise significant influence over the operating
and financial decisions of the affiliate. We use the cost method
of accounting if we are not able to exercise significant
influence over the operating and financial decisions of the
affiliate. All intercompany balances and transactions have been
eliminated in consolidation.
Change
in Presentation of Financial Statements
Prior period results have been reclassified for the retroactive
effect of discontinued operations. Refer to Note 3. In the
quarter ended June 30, 2008, we reclassified amounts
related to a vehicle assembly agreement from Automotive cost of
sales to Automotive sales to more appropriately report the
arrangement on a net basis. Certain reclassifications have been
made to the 2007 financial information to conform it to the
current period presentation.
Change in
Accounting Principles
Fair
Value Measurements
On January 1, 2008 we adopted Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value
Measurements” (SFAS No. 157), which provides a
consistent definition of fair value that focuses on exit price
and prioritizes, within a measurement of fair value, the use of
market-based inputs over entity-specific inputs.
SFAS No. 157 requires expanded disclosures about fair
value measurements and establishes a three-level hierarchy for
fair value measurements based on the observability of inputs to
the valuation of an asset or liability at the measurement date.
The standard also requires that a company consider its own
nonperformance risk when measuring liabilities carried at fair
value, including derivatives. In February 2008 the Financial
Accounting Standards Board (FASB) approved FASB Staff Position
(FSP)
No. 157-2,
“Effective Date of FASB
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Statement No. 157” (FSP
No. 157-2),
that permits companies to partially defer the effective date of
SFAS No. 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
FSP
No. 157-2
does not permit companies to defer recognition and disclosure
requirements for financial assets and financial liabilities or
for nonfinancial assets and nonfinancial liabilities that are
remeasured at least annually. SFAS No. 157 is
effective for financial assets and financial liabilities and for
nonfinancial assets and nonfinancial liabilities that are
remeasured at least annually for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. The provisions of SFAS No. 157 are applied
prospectively. We have decided to defer adoption of
SFAS No. 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
The effect of our adoption of SFAS No. 157 on
January 1, 2008 was not material and no adjustment to
Accumulated deficit was required. Refer to Note 11 for more
information regarding the impact of our adoption of
SFAS No. 157 with respect to financial assets and
liabilities.
The
Fair Value Option for Financial Assets and Financial
Liabilities — including an Amendment of
SFAS No. 115
On January 1, 2008 we adopted 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 were not previously
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 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.
SFAS No. 159 also establishes presentation and
disclosure requirements to help financial statement users
understand the effect of the election. We have not elected to
measure any financial assets and financial liabilities at fair
value which were not previously required to be measured at fair
value. Therefore, the adoption of this standard has had no
impact on our financial condition and results of operations.
Accounting
for Uncertainty in Income Taxes
On January 1, 2007 we adopted FASB Interpretation (FIN)
No. 48, “Accounting for Uncertainty in Income
Taxes” (FIN No. 48), which supplements
SFAS No. 109, “Accounting for Income Taxes”
(SFAS No. 109), by defining the confidence level that
a tax position must meet in order to be recognized in the
financial statements. FIN No. 48 requires that the tax
effect(s) 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. 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 No. 48, companies are
required to adjust their financial statements to reflect only
those tax positions that are more likely than not to be
sustained. We adopted FIN No. 48 as of January 1,2007, and recorded a decrease to Accumulated deficit of
$137 million as a cumulative effect of a change in
accounting principle with a corresponding decrease to the
liability for uncertain tax positions.
Accounting
for Nonrefundable Payments for Goods or Services to Be Used in
Future Research and Development Activities
In June 2007 the FASB ratified Emerging Issues Task Force (EITF)
No. 07-3,
“Accounting for Nonrefundable Payments for Goods or
Services to Be Used in Future Research and Development
Activities” (EITF
No. 07-3),
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. EITF
No. 07-3
is effective for new arrangements on a prospective basis for
fiscal years beginning after December 15, 2007. The
adoption of this guidance did not have a material effect on our
financial condition and results of operations.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounting
for Income Tax Benefits of Dividends on Share-Based Payment
Awards
In June 2007 the FASB ratified EITF
No. 06-11,
“Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards” (EITF
No. 06-11),
which requires entities to record to additional paid-in capital
the tax benefits on dividends or dividend equivalents that are
charged to accumulated deficit for certain share-based awards.
In a share-based payment arrangement, employees may receive
dividends or dividend equivalents on awards of nonvested equity
shares and 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 capital surplus should be included in the pool of
excess tax benefits available to absorb tax deficiencies on
share-based payment awards. EITF
No. 06-11
is effective for fiscal years beginning after December 15,2007, and interim periods within those fiscal years. The
adoption of this guidance did not have a material effect on our
financial condition and results of operations.
Accounting
Standards Not Yet Adopted
Business
Combinations
In December 2007 the FASB issued SFAS No. 141(R),
“Business Combinations” (SFAS No. 141(R)),
which retained the underlying concepts under existing standards
in that all business combinations are still required to be
accounted for at fair value under the acquisition method of
accounting but SFAS No. 141(R) changed the method of
applying the acquisition method in a number of significant
aspects. SFAS No. 141(R) will require that:
(1) for all business combinations, the acquirer records all
assets and liabilities of the acquired business, including
goodwill, generally at their fair values; (2) certain
pre-acquisition contingent assets and liabilities acquired be
recognized at their fair values on the acquisition date;
(3) contingent consideration be recognized at its fair
value on the acquisition date and, for certain arrangements,
changes in fair value will be recognized in earnings until
settled; (4) acquisition-related transaction and
restructuring costs be expensed rather than treated as part of
the cost of the acquisition and included in the amount recorded
for assets acquired; (5) in step acquisitions, previous
equity interests in an acquiree held prior to obtaining control
be re-measured to their acquisition-date fair values, with any
gain or loss recognized in earnings; and (6) when making
adjustments to finalize initial accounting, companies revise any
previously issued post-acquisition financial information in
future financial statements to reflect any adjustments as if
they had been recorded on the acquisition date.
SFAS No. 141(R) is effective on a prospective basis
for all business combinations for which the acquisition date is
on or after the beginning of the first annual period subsequent
to December 15, 2008, with the exception of the accounting
for valuation allowances on deferred taxes and acquired tax
contingencies. SFAS No. 141(R) amends
SFAS No. 109 such that adjustments made to valuation
allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective
date of this statement should also apply the provisions of
SFAS No. 141(R). Once effective, this standard will be
applied to all future business combinations.
Noncontrolling
Interests in Consolidated Financial Statements
In December 2007 the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB 51”
(SFAS No. 160), which amends Accounting Research
Bulletin (ARB) No. 51 “Consolidated Financial
Statements” (ARB No. 51) to establish new
standards that will govern the accounting for and reporting of
noncontrolling interests in partially owned consolidated
subsidiaries and the loss of control of subsidiaries. Also,
SFAS No. 160 requires that: (1) noncontrolling
interest, previously referred to as minority interest, be
reported as part of equity in the consolidated financial
statements; (2) losses be allocated to the noncontrolling
interest even when such allocation might result in a deficit
balance, reducing the losses attributed to the controlling
interest; (3) changes in ownership interests be treated as
equity transactions if control is maintained; (4) upon a
loss of control, any gain or loss on the interest sold be
recognized in earnings; and (5) the noncontrolling
interest’s share be recorded at the fair value of net
assets acquired, plus its share of goodwill.
SFAS No. 160 is effective on a prospective basis for
all fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, except for the
presentation and disclosure requirements, which will be applied
retrospectively. We are currently evaluating the effects that
SFAS No. 160 will have on our financial condition and
results of operations.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Disclosures
about Derivative Instruments and Hedging Activities —
an Amendment of FASB Statement No. 133
In March 2008 the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities — an Amendment of FASB Statement
No. 133” (SFAS No. 161), that expands the
disclosure requirements of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities” (SFAS No. 133).
SFAS No. 161 requires additional disclosures
regarding: (1) how and why an entity uses derivative
instruments; (2) how derivative instruments and related
hedged items are accounted for under SFAS No. 133; and
(3) how derivative instruments and related hedged items
affect an entity’s financial position, financial
performance, and cash flows. In addition, SFAS No. 161
requires qualitative disclosures about objectives and strategies
for using derivatives described in the context of an
entity’s risk exposures, quantitative disclosures about the
location and fair value of derivative instruments and associated
gains and losses, and disclosures about credit-risk-related
contingent features in derivative instruments.
SFAS No. 161 is effective for fiscal years and interim
periods within these fiscal years, beginning after
November 15, 2008.
Accounting
for Convertible Debt Instruments
In May 2008 the FASB ratified FSP No. APB
14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (Including Partial Cash
Settlement)” (FSP No. APB
14-1), which
requires issuers of convertible debt securities within its scope
to separate these securities into a debt component and into an
equity component, resulting in the debt component being recorded
at fair value without consideration given to the conversion
feature. Issuance costs are also allocated between the debt and
equity components. FSP No. APB
14-1 will
require that convertible debt within its scope reflect an
entity’s nonconvertible debt borrowing rate when interest
expense is recognized. FSP No. APB
14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years, and shall be applied retrospectively
to all prior periods. We estimate that upon adoption, interest
expense will increase for all periods presented with fiscal year
2009 pre-tax interest expense increasing by approximately
$125 million based on our current level of indebtedness.
Participating
Share-Based Payment Awards
In June 2008 the FASB ratified FSP No. EITF
03-6-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities” (FSP
No. EITF 03-6-1),
which addresses whether instruments granted in share-based
payment awards are participating securities prior to vesting
and, therefore, must be included in the earnings allocation in
calculating earnings per share under the two-class method
described in SFAS No. 128, “Earnings per
Share” (SFAS No. 128). FSP
No. EITF 03-6-1
requires that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend-equivalents be
treated as participating securities in calculating earnings per
share. FSP
No. EITF 03-6-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years, and shall be applied retrospectively
to all prior periods. We are currently evaluating the effects,
if any that FSP
No. EITF 03-6-1
may have on earnings per share.
Determination
of Whether an Equity-Linked Financial Instrument (or Embedded
Feature) is Indexed to an Entity’s Own Stock
In June 2008 the FASB ratified EITF
No. 07-5,
“Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (EITF
No. 07-5),
which requires that an instrument’s contingent exercise
provisions are analyzed first based upon EITF
No. 01-6,
“The Meaning of ‘Indexed to a Company’s Own
Stock’ ” (EITF
No. 01-6).
If this evaluation does not preclude consideration of an
instrument as indexed to its own stock, the instrument’s
settlement provisions are then analyzed. An instrument is
considered indexed to an entity’s own stock if its
settlement amount will equal the difference between the fair
value of a fixed number of the entity’s equity shares and a
fixed amount of cash or another financial asset. EITF
No. 07-5
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years, with recognition of a cumulative
effect of change in accounting principle for all instruments
existing at
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the effective date to the balance of retained earnings. We are
currently evaluating the effects, if any, that EITF
No. 07-5
may have on our financial condition and results of operations.
Accounting
for Collaborative Arrangements
In December 2007 the FASB ratified EITF
No. 07-1,
“Accounting for Collaborative Arrangements” (EITF
No. 07-1),
which requires revenue generated and costs incurred by the
parties in the collaborative arrangement be reported in the
appropriate line in each company’s financial statements
pursuant to the guidance in EITF
No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an
Agent” (EITF
No. 99-19)
and not account for such arrangements using the equity method of
accounting. EITF
No. 07-1
also includes enhanced disclosure requirements regarding the
nature and purpose of the arrangement, rights and obligations
under the arrangement, accounting policy, and the amount and
income statement classification of collaboration transactions
between the parties. EITF
No. 07-1
is effective for fiscal years beginning after December 15,2008, and interim periods within those fiscal years, and shall
be applied retrospectively (if practicable) to all prior periods
presented for all collaborative arrangements existing as of the
effective date. We are currently evaluating the effects, if any,
that EITF
No. 07-1
may have on the presentation and classification of these
activities in our consolidated financial statements.
Accounting,
by Lessees, for Nonrefundable Maintenance Deposits
In June 2008 the FASB ratified EITF
No. 08-3,
“Accounting by Lessees for Nonrefundable Maintenance
Deposits” (EITF
No. 08-3),
which specifies that nonrefundable maintenance deposits that are
contractually and substantively related to maintenance of leased
assets are to be accounted for as deposit assets. EITF
No. 08-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, with recognition of a
cumulative effect of change in accounting principle to the
opening balance of retained earnings for the first year
presented. We are currently evaluating the effects, if any, that
EITF
No. 08-3
may have on our financial condition and results of operations.
Note 3. Divesture
of Business
Sale
of Allison Transmission Business
In August 2007, we completed the sale of the commercial and
military operations of our Allison Transmission (Allison)
business. The results of operations and cash flows of Allison
have been reported in our condensed consolidated financial
statements as discontinued operations in the quarter and year to
date period ended June 30, 2007. Historically, Allison was
reported within GMNA.
The following table summarizes the results of discontinued
operations:
As part of the transaction, we entered into an agreement with
the buyers of Allison whereby we may 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 was not in compliance
with its financial maintenance covenant under a separate credit
agreement. Our financing would be contingent on the stockholders
of the new parent company of Allison committing to provide an
equivalent amount of funding to Allison, either in the form of
equity or a loan, and, if a loan, such loan would be granted on
the same terms as our loan to the new parent company of Allison.
At June 30, 2008 we have not provided financing pursuant to
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
this agreement. This commitment expires on December 31,2010. Additionally, both parties have entered into non-compete
arrangements for a term of 10 years in the United States
and for a term of five years in Europe.
Percentage ownership of Preferred Membership Interests issued
and outstanding
100
%
100
%
74
%
Carrying value of Preferred Membership Interests
$
294
$
1,046
$
1,596
Carrying value of Common Membership Interests
$
3,454
$
7,079
$
7,555
In the quarters ended March 31 and June 30, 2008, we
determined that our investments in GMAC Common and Preferred
Membership Interests were impaired and that such impairments
were other than temporary. Accordingly, we recorded impairment
charges of $726 million and $2.0 billion in the
quarter and year to date period ended June 30, 2008 in
Equity in loss of GMAC LLC to reduce the carrying value of our
investment in GMAC Common Membership Interests to its estimated
fair value of $3.5 billion after considering the impact of
recording our share of GMAC’s results in the quarter and
year to date period ended June 30, 2008. We also recorded
impairment charges of $608 million and $750 million in
the quarter and year to date period ended June 30, 2008,
respectively, in Automotive interest income and other
non-operating income (expense), net to reduce the carrying value
of our investment in Preferred Membership Interests to its
estimated fair value of $294 million at June 30, 2008.
Our measurements of fair value were determined in accordance
with SFAS No. 157 utilizing Level 3 inputs of the
fair value hierarchy established in SFAS No. 157.
Refer to Note 11 for further information on the specific
valuation methodology.
In the quarter ended June 30, 2008, GMAC elected not to pay
a quarterly dividend related to our Preferred Membership
Interests. We accrued dividends of $38 million and
$77 million for the quarter and year to date period ended
June 30, 2007, respectively, related to our Preferred
Membership Interests.
On January 1, 2008, GMAC adopted SFAS No. 157 and
No. 159. As a result of their adoption of
SFAS No. 157, GMAC recorded an adjustment to retained
earnings related to the recognition of day-one gains on
purchased mortgage servicing rights and certain residential loan
commitments. As a result of their adoption of
SFAS No. 159, GMAC elected to measure, at fair value,
certain financial assets and liabilities including certain
collateralized debt obligations and certain mortgage loans held
for investment in financing securitization structures. As a
result, we reduced our Equity in net assets of GMAC LLC and
increased our Accumulated deficit by $76 million in the
year to date period ended June 30, 2008 reflecting our
proportional share of the cumulative effect of GMAC’s
adoption of SFAS No. 157 and No. 159.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Refer to Note 16 for a description of the related party
transactions with GMAC.
Electro-Motive
Diesel, Inc.
In April 2008, we converted a note receivable with a basis of
$37 million, which resulted from the sale of our
Electro-Motive Division in April 2005, for a 30% common equity
interest in Electro-Motive Diesel, Inc. the successor company
(EMD). We subsequently sold our common equity interest in EMD
for $80 million in cash and a note receivable of
$7 million, due in December 2008. We recognized a gain on
the sale of our common equity interest of $50 million,
which is recorded in Automotive interest income and other
non-operating income (expense), net.
Note 6. 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 is as follows:
Increase in liability (warranties issued during period)
2,126
5,135
2,592
Payments
(2,594
)
(4,539
)
(2,240
)
Adjustments to liability (pre-existing warranties)
268
(165
)
(95
)
Effect of foreign currency translation
71
223
142
Liabilities transferred in the sale of Allison (Note 3)
—
(103
)
(103
)
Ending balance
$
9,486
$
9,615
$
9,360
We review and adjust 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)
Note 8. Pensions
and Other Postretirement Benefits
Adoption
of SFAS No. 158
We recognize the funded status of our benefit plans in
accordance with the provisions of SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R)” (SFAS No. 158).
Additionally, we 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 obligations 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 our year end, we recorded an increase to
Accumulated deficit of $782 million, $425 million
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 in
the quarter ended March 31, 2007 on a delayed basis. We
also performed a measurement at January 1, 2007 for those
benefit plans whose previous measurement dates were not
historically consistent with our year end. As a result of the
January 1, 2007 measurement, we recorded a decrease to
Accumulated other comprehensive loss of $2.3 billion,
$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 partially by an
immaterial adjustment of $390 million, $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.
The components of pension and other postemployment benefits
(OPEB) net periodic expense (income) for the quarter and the
year to date period ended June 30, 2008 are as follows:
As a result of the Allison divestiture discussed in Note 3,
we recorded an adjustment to the unamortized prior service cost
of our U.S. hourly and salaried pension plans of
$18 million and our U.S. hourly and salaried OPEB
plans of $223 million in the quarter ended
September 30, 2007. Those adjustments were included in the
determination of the gain recognized on the sale of Allison. The
net periodic pension and OPEB expenses related to Allison were
reported as a component of discontinued operations. All such
amounts related to Allison are reflected in the tables above,
and the effects of those amounts are shown as an adjustment to
arrive at net periodic pension and OPEB expense (income) from
continuing operations.
Settlement
Agreement
In October 2007, we signed a Memorandum of
Understanding — Post-Retirement Medical Care (Retiree
MOU) with the International Union, United Automotive, Aerospace
and Agricultural Implement Workers of America (UAW), now
superseded by the settlement agreement entered into in February
2008 (Settlement Agreement). The Settlement Agreement provides
that responsibility for providing retiree health care will
permanently shift from us to a new retiree plan funded by a new
independent Voluntary Employee Beneficiary Association trust
(New VEBA). The United States District Court for the Eastern
District of Michigan certified the class and granted preliminary
approval of the Settlement Agreement and we mailed notices to
the class in March 2008. The fairness hearing was held on
June 3, 2008 and on July 31, 2008 the court approved
the Settlement Agreement. All appeals, if any, are expected to
be exhausted no later than January 1, 2010.
When fully implemented, the Settlement Agreement will cap our
payment for retiree healthcare obligations to UAW associated
employees, retirees and dependents as defined in the Settlement
Agreement; will supersede and replace the 2005 UAW Health Care
Settlement Agreement, as discussed in our 2007
10-K; and
will transfer responsibility for administering retiree
healthcare benefits for these individuals to a new retiree
health care plan (the New Plan) to be established and funded by
the New VEBA. Before it can become effective, the Settlement
Agreement is subject to the exhaustion of any appeals of the
July 31, 2008 court approval and the completion of
discussions between us and the SEC regarding whether the
accounting treatment for the transactions contemplated by the
Settlement Agreement is on a basis we find to be reasonably
satisfactory. In light of these contingencies, no recognition of
the Settlement Agreement has been made in these condensed
consolidated financial statements. The Settlement Agreement
provides that on the later of January 1, 2010, or final
court approval of the Settlement Agreement including the
expiration of all appeals (Final Settlement Date), we will
transfer our obligations to provide covered UAW employees with
postretirement medical benefits to the New Plan.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In accordance with the Settlement Agreement, effective
January 1, 2008 for bookkeeping purposes only, we divided
the existing internal VEBA into two bookkeeping accounts. One
account consists of the percentage of the existing internal
VEBA’s assets at January 1, 2008 that is equal to the
estimated percentage of our hourly OPEB obligation covered by
the existing internal VEBA attributable to non-UAW represented
employees and retirees, their eligible spouses, surviving
spouses and dependents (Non-UAW Related Account) and had a
balance of $1.2 billion. The second account consists of the
remaining percentage of the assets in the existing internal VEBA
at January 1, 2008 (UAW Related Account) and had a balance
of $14.5 billion. No amounts will be withdrawn from the UAW
Related Account, including its investment returns, from
January 1, 2008 until the transfer of assets to the New
VEBA.
In February 2008, pursuant to the Settlement Agreement, we
issued a $4.0 billion short-term note (Short-Term Note) to
LBK, LLC, a Delaware limited liability company of which we are
the sole member (LBK). The Short-Term Note pays interest at a
rate of 9% and matures on the date that the face amount of the
Short-Term Note is paid with interest to the New VEBA in
accordance with the terms of the Settlement Agreement. LBK will
hold the Short-Term Note until maturity.
In February 2008, pursuant to the Settlement Agreement, we
issued $4.4 billion principal amount of our 6.75%
Series U Convertible Senior Debentures due
December 31, 2012 (Convertible Note) to LBK. LBK will hold
the Convertible Note until it is transferred to the New VEBA in
accordance with the terms of the Settlement Agreement. Interest
on the Convertible Note is payable semiannually. In accordance
with the Settlement Agreement, LBK would have transferred any
interest it receives on the Convertible Note to a temporary
asset account we maintain. The funds in the temporary asset
account would have been transferred to the New VEBA in
accordance with the terms of the Settlement Agreement.
As allowed by the Settlement Agreement and consented to by the
Class Counsel, we are deferring approximately
$1.7 billion of payments contractually required under the
Settlement Agreement to the New VEBA, including interest on the
above mentioned Convertible Note which would have been payable
to the temporary asset accounts in 2008 and 2009. These payments
are deferred until the Final Settlement Date and will be
increased by an annual interest factor of 9%.
In conjunction with the issuance of the Convertible Note, we
entered into certain cash-settled derivative instruments
maturing on June 30, 2011 with LBK that will have the
economic effect of reducing the conversion price of the
Convertible Note from $40 to $36. These derivative instruments
will also entitle us to partially recover the additional
economic value provided if our common stock price appreciates to
between $63.48 and $70.53 per share by June 30, 2011 and to
fully recover the additional economic value provided if our
common stock price reaches $70.53 per share or above by
June 30, 2011. Pursuant to the Settlement Agreement, LBK
will transfer its interests in the derivatives to the New VEBA
when the Convertible Note is transferred from LBK to the New
VEBA following the Implementation Date.
Because LBK is a wholly-owned consolidated subsidiary, these
securities, and the related interest income and expense, have
been and will continue to be eliminated in our condensed
consolidated financial statements until the Final Settlement
Date.
Beginning in 2009, we may be required, under certain
circumstances, to contribute an additional $165 million per
year, limited to a maximum of an additional 19 payments, to
either the temporary asset account or the New VEBA (when
established). Such contributions will be required only if annual
cash flow projections show that the New VEBA will become
insolvent on a rolling
25-year
basis. However, the potential $165 million contribution due
in 2009 will be deferred until the Final Settlement Date and
increased by an annual interest factor of 9%. At any time, we
will have the option to prepay all remaining contingent
$165 million payments.
Additionally, at the Final Settlement Date, which is expected to
be in 2010, we would be required to transfer $7.0 billion,
including the deferred amounts discussed above, subject to
adjustment, to the New VEBA. Further at that time, we may either
transfer an additional $5.6 billion to the New VEBA,
subject to adjustment, or we may instead opt to make annual
payments of varying amounts between $421 million and
$3.3 billion through 2020. At any time after the Final
Settlement Date we will have the option to prepay all remaining
payments.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2008
Special Attrition Programs and U.S. Facility
Idlings
In February 2008 we entered into agreements with the UAW and the
International Union of Electronic, Electrical, Salaried, Machine
and Furniture Workers of America — Communication
Workers of America (IUE-CWA) regarding special attrition
programs which were intended to further reduce the number of
hourly employees. The UAW attrition program (2008 UAW Special
Attrition Program) offered to our 74,000 UAW-represented
employees consists of wage and benefit packages for normal and
voluntary retirements, buyouts or pre-retirement employees with
26 to 29 years of service. In addition to their vested
pension benefits, those employees that are retirement eligible
will receive a lump sum payment, depending upon job
classification, that will be funded from our U.S. hourly
pension plan. For those employees not retirement eligible, other
buyout options were offered. The terms offered to the 2,300
IUE-CWA represented employees (2008 IUE-CWA Special Attrition
Program) are similar to those offered through the 2008 UAW
Special Attrition Program. As a result of the 2008 UAW Special
Attrition Program and 2008 IUE-CWA Special Attrition Program
(2008 Special Attrition Programs), we recognized a curtailment
loss on the U.S hourly pension plan under SFAS No. 88
“Employers’ Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits” (SFAS No. 88), of
$2.4 billion (measured at May 31, 2008) due to
the significant reduction in the expected aggregate years of
future service as a result of the employees accepting the
voluntary program. In addition, we recorded $633 million
and $800 million of special termination benefits for
irrevocable employee acceptances in the quarter and year to date
period ended June 30, 2008, respectively. The combined
curtailment loss and other special termination benefits in the
quarter and year to date period ended June 30, 2008 of
$3.0 billion and $3.2 billion, respectively, were
recorded in Automotive cost of sales.
In addition to the expenses discussed above, the remeasurement
of the U.S. hourly pension plan at May 31, 2008
generated an increase in net periodic pension income of
$7 million in the quarter and year to date period ended
June 30, 2008, as compared to the amount determined in
connection with the December 31, 2007 remeasurement. The
U.S. hourly pension plan remeasurement resulted in an
increase to the projected benefit obligation (PBO) of
$842 million at May 31, 2008, which includes the
impact of other previously announced facility idlings in the
U.S. as well as changes in certain actuarial assumptions.
The discount rate used to determine the PBO at May 31, 2008
was 6.45%. This represents a 15 basis point increase from
the 6.30% used at December 31, 2007. This impact is
reflected in the tables above.
In anticipation of the possibility of a curtailment as a result
of the 2008 UAW Special Attrition Program, we remeasured the UAW
hourly medical plan at May 31, 2008. Subsequent to the
remeasurement we determined that a curtailment did not occur,
however as required by SFAS No. 106,
“Employers’ Accounting for Postretirement Benefits
Other than Pensions” (SFAS No. 106), we have
recorded the effects of the May 31, 2008 remeasurement of
the UAW hourly medical plan in our condensed consolidated
financial statements. This impact resulted in an immaterial
adjustment to accumulated postretirement benefit obligation
(APBO) and our net periodic OPEB expense which is reflected in
the tables above. As a result of the 2008 Special Attrition
Programs a number of smaller OPEB plans were curtailed in
accordance with SFAS No. 106. The remeasurements of
these plans resulted in a $104 million curtailment gain
under SFAS No. 106. In addition we recorded
$68 million of special termination benefits and other costs
in the quarter and year to date period ended June 30, 2008
related to OPEB plans.
Canada
Facility Idlings and Canadian Auto Workers Union
Negotiations
In the quarter ended June 30, 2008, we reached an agreement
with the Canadian Auto Workers Union (CAW) (2008 CAW Agreement)
which resulted in increased pension benefits. Additionally,
subsequent to reaching an agreement with the CAW, we announced
our plan to cease production at the Oshawa Truck Plant (Oshawa)
in Canada due to a decrease in consumer demand for trucks which
triggered a curtailment of the Canadian hourly and salaried
pension plans (Canadian Pension Plans). Accordingly, we
remeasured the Canadian Pension Plans at May 31, 2008 using
a discount rate of 6.0%. Also included in the remeasurement were
the effects of other previously announced facility idlings as
well as changes in certain other actuarial assumptions. The
remeasurements resulted in a curtailment loss of
$177 million under SFAS No. 88 related to the
Canadian Pension Plans and, before foreign exchange effects, an
increase to the PBO of $262 million. In addition, we
recorded $37 million of contractual termination benefits in
the quarter and year to date period ended June 30, 2008.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Prior to the 2008 CAW Agreement, we amortized prior service cost
related to our hourly defined benefit pension plan in Canada
over the remaining service period for active employees at the
time of the amendment, currently estimated to be 10 years.
In conjunction with entering into the 2008 CAW Agreement, we
evaluated the 2008 CAW Agreement and the relationship with the
CAW and determined that the contractual life of the labor
agreements is now a better reflection of the period of future
economic benefit received from pension plan amendments
negotiated as part of our collectively bargained agreement.
Therefore, we are amortizing these amounts over a three year
period. We recorded $334 million of additional net periodic
pension expense in the quarter and year to date period ended
June 30, 2008 related to the accelerated recognition of
previously unamortized prior service costs related to pension
increases in Canada from prior collectively bargained
agreements. This additional expense is primarily related to a
change in the amortization period of existing prior service
costs at the time of the 2008 CAW Agreement. The combined
pension related charges of $548 million were recorded in
Automotive cost of sales in the quarter and year to date period
ended June 30, 2008.
Additionally, we remeasured the Canadian Hourly Retiree Medical
Plan on May 31, 2008. The remeasurement reflected the plan
amendment in the 2008 CAW Agreement as well as the announced
capacity reductions and utilized updated actuarial assumptions,
including the discount rate. The remeasurement resulted in an
immaterial adjustment to the APBO and to net periodic OPEB
expense for the quarter and year to date period ended
June 30, 2008.
Legal
Services Plans and Restatement of Financial
Information
The accompanying condensed consolidated balance sheet and
statement of stockholders’ deficit at June 30, 2007
have been restated to correct the accounting for certain benefit
plans that provide legal services to hourly employees
represented by the UAW, IUE-CWA and the CAW (Legal Services
Plans) as discussed in our 2007
10-K. In
order to correct the condensed consolidated balance sheet at
June 30, 2007, we increased deferred tax assets and OPEB
liabilities by $112 million and $323 million,
respectively. This resulted in a reduction of $211 million
to the previously reported stockholders’ deficit at
June 30, 2007. We have not restated the condensed
consolidated statements of operations or cash flows for the
quarter and year to date period ended June 30, 2007 for
this misstatement because we have concluded that the impact is
immaterial.
Note 9. Commitments
and Contingencies
Commitments
We have provided guarantees related to the residual value of
certain operating leases. At June 30, 2008, the maximum
potential amount of future undiscounted payments that could be
required to be made under these guarantees amounted to
$95 million. These guarantees terminate during years
ranging from 2008 to 2035. Certain leases contain renewal
options. In May 2008, we purchased our headquarters building in
Detroit. Prior to the purchase, we were leasing the building
under an operating lease and had guaranteed $626 million
related to its residual value. The guarantee expired in
conjunction with the acquisition.
We have agreements with third parties that guarantee the
fulfillment of certain suppliers’ commitments and related
obligations. At June 30, 2008, the maximum potential future
undiscounted payments that could be required to be made under
these guarantees amount to $631 million. Included in this
amount is $570 million which relates to a guarantee
provided to GMAC in Brazil in connection with dealer floor plan
financing. This guarantee is secured by a $653 million
certificate of deposit provided by GMAC to which we have title.
These guarantees terminate during years ranging from 2008 to
2017, or upon the occurrence of specific events, such as an
entity’s cessation of business. We have recorded
liabilities totaling $26 million related to these
guarantees.
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 may also apply to certain guarantees.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We also provide payment guarantees on commercial loans made by
GMAC and outstanding with certain third parties, such as dealers
or rental car companies. At June 30, 2008, the maximum
commercial obligations we guaranteed related to these loans was
$132 million. Years of expiration related to these
guarantees range from 2008 to 2012. We determined the value
ascribed to the guarantees to be insignificant based on the
credit worthiness of the third parties.
In connection with certain divestitures of assets or operating
businesses, we have entered into agreements indemnifying certain
buyers and other parties with respect to environmental
conditions pertaining to real property we owned. Also, in
connection with such divestitures, we have provided guarantees
with respect to benefits to be paid to former employees relating
to pensions, postretirement health care and life insurance.
Aside from indemnifications and guarantees related to Delphi
Corporation (Delphi) or a specific divested unit, both of which
are discussed below, due to the conditional nature of these
obligations it is not possible to estimate our maximum exposure
under these indemnifications or guarantees. No amounts have been
recorded for such obligations as they are not probable and
estimable at this time.
In addition to the guarantees and indemnifying agreements
mentioned above, we periodically enter 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 we may
be exposed cannot be estimated. No amounts have been recorded
for such indemnities as our obligations under them are not
probable and estimable at this time.
Refer to Note 16 for additional information on guarantees
that we provide to GMAC.
Environmental
Our 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. We are
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 can be reasonably
estimated. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts
reserved will be paid 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 cannot be reasonably
estimated 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 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 our opinion that none of these
items, when finally resolved, is expected to have a material
adverse effect on our financial position or liquidity. However,
it is possible that the resolution of one or more environmental
matters could exceed the amounts accrued in an amount that could
be material to our results of operations in any particular
reporting period.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Asbestos
Claims
Like most automobile manufacturers, we have been subject to
asbestos-related claims in recent years. We have 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;
•
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 we owned.
While we have resolved many of the asbestos-related cases over
the years and continue to do so for strategic litigation reasons
such as avoiding defense costs and possible exposure to
excessive verdicts, we believe that only a small proportion of
the claimants has or will develop any asbestos-related physical
impairment. Only a small percentage of the claims pending
against us allege causation of a 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.
We record the estimated liability associated with asbestos
personal injury claims where the expected loss is both probable
and can reasonably be estimated. In the quarter ended
December 31, 2007, we retained Hamilton,
Rabinovitz & Associates, Inc. (HRA), a firm
specializing in estimating asbestos claims to assist us in
determining our potential liability for pending and unasserted
future asbestos personal injury claims. The analysis relies on
and includes the following information and factors:
•
A third party forecast of the projected incidence of malignant
asbestos-related disease likely to occur in the general
population of individuals occupationally exposed to asbestos;
•
Data concerning claims filed against us and resolved, amounts
paid, and the nature of the asbestos-related disease or
condition asserted during approximately the last four years
(Asbestos Claims Experience);
•
The estimated rate of asbestos-related claims likely to be
asserted against us in the future based on our Asbestos Claims
Experience and the projected incidence of asbestos-related
disease in the general population of individuals occupationally
exposed to asbestos;
•
The estimated rate of dismissal of claims by disease type based
on our Asbestos Claims Experience; and
•
The estimated indemnity value of the projected claims based on
our Asbestos Claims Experience, adjusted for inflation.
We reviewed a number of factors, including the analysis provided
by HRA and increased our reserve by $349 million in the
quarter ended December 31, 2007 to reflect a reasonable
estimate of our probable liability for pending and future
asbestos-related claims projected to be asserted over the next
ten years, including legal defense costs. We will monitor our
actual claims experience for consistency with this estimate and
make periodic adjustments as appropriate.
We believe that our analysis was based on the most relevant
information available combined with reasonable assumptions, and
that we may prudently rely on its conclusions to determine the
estimated liability for asbestos-related claims. We note,
however, that the analysis is inherently subject to significant
uncertainties. The data sources and assumptions used in
connection with the analysis may not prove to be reliable
predictors with respect to claims asserted against us. Our
experience in the recent past includes substantial variation in
relevant factors, and a change in any of these
assumptions — which include the source of the claiming
population, the filing rate and the value of claims —
could significantly increase or decrease the estimate. In
addition, other external factors such as legislation affecting
the format or timing of litigation, the actions of other
entities sued in asbestos personal injury actions, the
distribution of assets from various trusts established to pay
asbestos claims and the outcome of cases litigated to a final
verdict could affect the estimate.
At June 30, 2008, December 31, 2007 and June 30,2007, our liability recorded for asbestos-related matters was
$672 million, $637 million and $538 million,
respectively. The reserve balance between June 30, 2007 and
December 31,
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2007 increased primarily as a result of a $349 million
increase in the reserve for probable pending and future asbestos
claims, as discussed above, which was partially offset by a
reduction in the reserve for existing claims of
$251 million resulting from fewer claims and lower expenses
than previously estimated.
Contingent
Matters — Litigation
Various legal actions, governmental investigations, claims and
proceedings are pending against us, including a number of
shareholder class actions, bondholder class actions, shareholder
derivative suits and class actions under the U.S. Employee
Retirement Income Security Act of 1974, as amended (ERISA), 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. In certain cases we are the plaintiff or appellant
related to these types of matters.
With regard to the litigation matters discussed in the previous
paragraph, we have established reserves for matters in which we
believe 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 us to pay damages or make other
expenditures in amounts that could not be reasonably estimated
at June 30, 2008. We believe that we have appropriately
accrued for such matters under SFAS No. 5
“Accounting for Contingencies” (SFAS No. 5),
or, for matters not requiring accrual, that such matters will
not have a material adverse effect on our results of operations
or financial position based on information currently available
to us. Litigation is inherently unpredictable, however, and
unfavorable resolutions could occur. Accordingly, it is possible
that an adverse outcome from such proceedings could exceed the
amounts accrued in an amount that could be material to us with
respect to our results of operations in any particular reporting
period.
In July 2008 we reached a tentative settlement of the General
Motors Securities Litigation suit and recorded a charge of
$277 million in the quarter ended June 30, 2008. We
believe that a portion of our settlement costs are covered by
insurance. We anticipate recording income of approximately
$200 million in the third quarter of 2008 associated with
insurance-related indemnification proceeds for previously
recorded litigation related costs, including the cost incurred
to settle the General Motors Securities Litigation suit.
Delphi
Corporation
Benefit
Guarantee
In 1999, we spun-off Delphi Automotive Systems Corporation
(DASC), which became Delphi. Delphi is our largest supplier of
automotive systems, components and parts and we are
Delphi’s largest customer. At the time of the spin-off,
employees of DASC became employees of Delphi. As part of the
separation agreements, Delphi assumed the pension and other
postretirement benefit obligations for these transferred
U.S. hourly employees who retired after October 1,2000 and we retained pension and other postretirement
obligations for U.S. hourly employees who retired on or
before October 1, 2000. Additionally at the time of the
spin-off, we entered into separate agreements with the UAW, the
IUE-CWA and the United Steel Workers (USW) (individually, the
UAW, IUE-CWA and USW Benefit Guarantee Agreements and,
collectively, the Benefit Guarantee Agreements) providing
contingent benefit guarantees whereby we would make payments for
certain pension benefits and OPEB to certain former
U.S. hourly employees that became employees of Delphi
(defined as Covered Employees). Each Benefit Guarantee Agreement
contains separate benefit guarantees relating to pension and
OPEB obligations, with different triggering events. The UAW,
IUE-CWA and USW required through the Benefit Guarantee
Agreements that in the event that Delphi or its successor
companies ceases doing business or becomes subject to financial
distress we could be liable if Delphi fails to provide the
corresponding benefits at the required level. The Benefit
Guarantee Agreements do not obligate us to guarantee any
benefits for Delphi retirees in excess of the corresponding
benefits we provide at the time to our own hourly retirees.
Accordingly, any reduction in the benefits we provide our hourly
retirees reduces our obligation under the
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
corresponding benefit guarantee. In turn, Delphi has entered
into an agreement (Indemnification Agreement) with us that
requires Delphi to indemnify us if we are required to perform
under the UAW Benefit Guarantee Agreement. In addition, with
respect to pension benefits, our guarantee 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 Indemnification Agreement and the UAW
Benefit Guarantee Agreements were recently extended until
September 30, 2008.
We received notice from Delphi, dated October 8, 2005, that
it was more likely than not that we would become obligated to
provide benefits pursuant to the Benefit Guarantee Agreements,
in connection with its commencement of Chapter 11
proceedings under the U.S. Bankruptcy Code. The notice
stated that Delphi was unable to estimate the timing and scope
of any benefits we might be required to provide under the
Benefit Guarantee Agreements; however, in 2005, we believed it
was probable that we had incurred a liability under the Benefit
Guarantee Agreements. Also, on October 8, 2005, Delphi
filed a petition for Chapter 11 proceedings under the
U.S. Bankruptcy Code for itself and many of its
U.S. subsidiaries. In June 2007 we entered into a
Memorandum of Understanding with Delphi and the UAW (Delphi UAW
MOU) which included terms relating to the consensual triggering
of the UAW Benefit Guarantee Agreement as well as additional
terms relating to Delphi’s restructuring. Under the Delphi
UAW MOU we also agreed to pay for certain healthcare costs of
Delphi retirees and their beneficiaries in order to provide a
level of benefits consistent with those provided to our retirees
and their beneficiaries from the Mitigation Plan VEBA, as
discussed in our 2007
10-K. We
also committed to pay $450 million to settle a UAW claim
asserted against Delphi, which the UAW has directed us to pay
directly to the GM UAW VEBA trust. Such amount is expected to be
amortized to expense over future years. In August 2007, we
entered into a Memorandum of Understanding with Delphi and the
IUE-CWA (Delphi IUE-CWA MOU), and we entered into two separate
Memoranda of Understanding with Delphi and the USW (collectively
the USW MOUs). The terms of the Delphi IUE-CWA MOU and the USW
MOUs are similar to the Delphi UAW MOU with regard to the
consensual triggering of the Benefit Guarantee Agreements.
Delphi-GM
Settlement Agreements
We have entered into comprehensive settlement agreements with
Delphi (Delphi-GM Settlement Agreements) consisting of a Global
Settlement Agreement, as amended (GSA) and a Master
Restructuring Agreement, as amended (MRA) that would become
effective upon Delphi’s substantial consummation of its
Plan of Reorganization (POR) and our receipt of consideration
provided for in the POR. The GSA is intended to resolve
outstanding issues between Delphi and us that have arisen or may
arise before Delphi’s emergence from Chapter 11. The
MRA is intended to govern certain aspects of our commercial
relationship following Delphi’s emergence from
Chapter 11. The more significant items contained in the
Delphi-GM Settlement Agreements include our commitment to:
•
Reimburse Delphi for its costs to provide OPEB to certain of
Delphi’s hourly retirees from and after January 1,2007 through the date that Delphi ceases to provide such
benefits;
•
Reimburse Delphi for the “normal cost” of credited
service in Delphi’s pension plan between January 1,2007 and the date its pension plans are frozen;
•
Assume $1.5 billion of net pension obligations of Delphi
and Delphi providing us a $1.5 billion note receivable;
•
Reimburse Delphi for all retirement incentives and half of the
buyout payments made pursuant to the various attrition program
provisions and to reimburse certain U.S. hourly buydown
payments made to hourly employees of Delphi;
•
Award future product programs to Delphi and provide Delphi with
ongoing preferential sourcing for other product programs, with
Delphi re-pricing existing and awarded business;
•
Reimburse certain U.S. hourly labor costs incurred to
produce systems, components and parts for us from
October 1, 2006 through September 14, 2015 at certain
U.S. facilities owned or to be divested by Delphi (Labor
Cost Subsidy);
•
Reimburse Delphi’s cash flow deficiency attributable to
production at certain U.S. facilities that continue to
produce systems, components and parts for us until the
facilities are either closed or sold by Delphi (Production Cash
Burn Support); and
•
Guarantee a minimum recovery of the net working capital that
Delphi has invested in certain businesses held for sale.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition, Delphi agreed to provide us or our designee with an
option to purchase all or any of certain Delphi businesses for
one dollar if such businesses have not been sold by certain
specified deadlines. If such a business is not sold either to a
third party or to us or any affiliate pursuant to the option by
the applicable deadline, we (or at our option, an affiliate)
will be deemed to have exercised the purchase option, and the
unsold business, including materially all of its assets and
liabilities, will automatically transfer to the GM
“buyer”. Similarly, under the Delphi UAW MOU if such a
transfer has not occurred by the applicable deadline,
responsibility for the UAW hourly employees of such an unsold
business affected would automatically transfer to us or our
designated affiliate.
The GSA also resolves all claims in existence as of the
effective date of Delphi’s POR that either Delphi or we
have or may have against the other. Additionally, the GSA
provides that Delphi will pay us: (1) $1.5 billion in
a combination of at least $750 million in cash and a second
lien note; and (2) $1.0 billion in junior preferred
convertible stock at POR value upon Delphi’s substantial
consummation of its POR. In February 2008 we informed Delphi
that we were prepared to reduce the cash portion of our
distributions significantly and accept an equivalent amount of
debt in the form of a first or second lien note to help
facilitate Delphi’s successful emergence from bankruptcy
proceedings. Under Delphi’s POR and as a result of our
agreed participation in Delphi’s exit financing, our total
recovery would have consisted of $300 million in cash,
$2.7 billion in second lien debt and $1.0 billion in
junior preferred convertible stock at the POR value. The second
lien debt includes $1.5 billion relating to our assumption
of $1.5 billion of Delphi net pension obligations. The
ultimate value of any consideration is contingent on the fair
market value of Delphi’s securities upon emergence from
bankruptcy. In the course of discussions since April 2008, it
has become clear that based on negotiations with Delphi and
other stakeholders the structure and amounts of our
distributions would change.
In January 2008, Delphi withdrew its March 2006 motion under the
U.S. Bankruptcy Code seeking to reject certain supply
contracts with us.
The Bankruptcy Court entered an order on January 25, 2008
confirming Delphi’s POR, including the Delphi-GM Settlement
Agreements. On April 4, 2008, Delphi announced that
although it had met the conditions required to substantially
consummate its POR, including obtaining $6.1 billion in
exit financing, Delphi’s plan investors refused to
participate in the closing of the transaction contemplated by
the POR, which was commenced but not completed because of the
plan investors’ position. The current credit markets, the
lack of plan investors and the challenges facing the auto
industry make it difficult for Delphi to emerge from bankruptcy.
As a result, it is unlikely that Delphi will emerge from
bankruptcy in the near-term. We believe that Delphi will
continue to seek alternative arrangements to emerge from
bankruptcy, but there can be no assurance that Delphi will be
successful in obtaining any alternative arrangements. The
resulting uncertainty could potentially disrupt our ability to
plan future production and realize our cost reduction goals,
affect our relationship with the UAW, result in our providing
additional financial support to Delphi, receive less than the
distributions that we expected from the resolution of
Delphi’s bankruptcy proceedings, and assume some of
Delphi’s obligations to its workforce and retirees.
We continue to work with Delphi and its stakeholders to
facilitate Delphi’s efforts to emerge from bankruptcy. As
part of this effort, in May 2008, we agreed to advance up to
$650 million to Delphi during 2008, which is within the
amounts we would have owed under the Delphi-GM Settlement
Agreements had Delphi emerged from bankruptcy in April 2008. In
August 2008 we agreed to increase the amount we could advance to
$950 million during 2008, which is within the amounts we
would owe under the Delphi-GM Settlement Agreements if Delphi
were to emerge from bankruptcy in December 2008. We will receive
an administrative claim for funds we advance to Delphi under
this arrangement. We also are discussing with Delphi the
possible implementation of the Delphi-GM Settlement Agreements
in the near-term.
In the quarter and year to date period ended June 30, 2008,
we recorded charges in Other expenses of $2.8 billion and
$3.5 billion, respectively, to increase our net liability
related to the Benefit Guarantee Agreements, primarily due to
expectations of increased obligations and updated estimates
reflecting uncertainty around the nature, value and timing of
our recoveries upon emergence of Delphi from bankruptcy. In
addition, in the quarter ended June 30, 2008, we recorded a
charge of $294 million primarily in connection with the
Delphi-GM Settlement Agreements in Automotive cost of sales. In
the quarter and year to date
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
period ended June 30, 2007, we recorded charges in Other
expenses totaling $575 million to increase our estimated
liability under the Benefit Guarantee Agreements and Delphi-GM
Settlement Agreements. Since 2005, we have recorded total
charges of $11.0 billion in Other expenses in connection
with the Benefit Guarantee Agreements and Delphi-GM Settlement
Agreements which reduces recovery on our bankruptcy claims to
$0. These charges are net of consideration we may receive for
assumption of Delphi’s net pension obligations. Our
commitments under the Delphi-GM Settlement Agreements for the
Labor Cost Subsidy and Production Cash Burn Support in the
quarter ended June 30, 2008 are included in the
$294 million charge and are expected to result in
additional expense of between $250 million and
$400 million annually in 2009 through 2015, which will be
treated as a period cost and expensed as incurred as part of
Automotive cost of sales. Due to the uncertainties surrounding
Delphi’s ability to emerge from bankruptcy it is reasonably
possible that additional losses could arise in the future, but
we currently are unable to estimate the amount or range of such
losses, if any.
Benefit
Guarantees Related to Divested Facilities
We have entered into various guarantees regarding benefits for
our former employees at two previously divested facilities that
manufacture component parts whose results continue to be
included in our consolidated financial statements in accordance
with FASB Interpretation (FIN) No. 46(R),
“Consolidation of Variable Interest Entities”
(FIN No. 46(R)). For these divested facilities, we
entered into agreements with both of the purchasers to
indemnify, defend and hold each purchaser harmless for any
liabilities arising out of the divested facilities and with the
UAW guaranteeing certain postretirement health care benefits and
payment of postemployment benefits.
In 2007, we recognized favorable adjustments of $44 million
related to these facility idlings, in addition to a
$38 million curtailment gain with respect to OPEB.
Note 10. Income
Taxes
Under Accounting Principles Board Opinion No. 28,
“Interim Financial Reporting” (APB No. 28), we
are required to adjust our effective tax rate each quarter to be
consistent with the estimated annual effective tax rate. We are
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.
Pursuant to SFAS No. 109, valuation allowances have
been established for deferred tax assets based on a “more
likely than not” threshold. Our ability to realize our
deferred tax assets depends on our ability to generate
sufficient taxable income within the carryback or carryforward
periods provided for in the tax law for each applicable tax
jurisdiction. We have considered the following possible sources
of taxable income when assessing the realization of our deferred
tax assets:
•
Future reversals of existing taxable temporary differences;
•
Future taxable income exclusive of reversing temporary
differences and carryforwards;
•
Taxable income in prior carryback years; and
•
Tax-planning strategies.
Pursuant to SFAS No. 109, concluding that a valuation
allowance is not required is difficult when there is significant
negative evidence which is objective and verifiable, such as
cumulative losses in recent years. We utilize a rolling three
years of actual and current year anticipated results as our
primary measure of our cumulative losses in recent years.
However, because a substantial portion of those cumulative
losses related to various non-recurring matters and the
implementation of our North American Turnaround Plan, we
adjusted those three-year cumulative results for the effect of
these items. The analysis performed in the quarters ended
September 30, 2007 and March 31, 2008 indicated that
in the United States, Canada, Germany
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and the United Kingdom, we had cumulative three-year losses on
an adjusted basis. In Spain, we anticipate being in a cumulative
three-year loss position in the near-term. This is considered
significant negative evidence which is objective and verifiable
and therefore, difficult to overcome. In addition, as discussed
in “Near-Term Market Challenges” our near-term
financial outlook in these jurisdictions remains challenging.
Accordingly, in the quarter ended September 30, 2007, we
concluded that the objectively verifiable negative evidence of
our recent historical losses combined with our challenging
near-term outlook out-weighed other factors and that it was more
likely than not that we would not generate taxable income to
realize our net deferred tax assets, in whole or in part in the
United States, Canada and Germany. Our three-year adjusted
cumulative loss in the United States at June 30, 2008 has
increased from that at December 31, 2007; therefore we
continue to believe this conclusion is appropriate. As it
relates to our assessment in the United States, many factors in
our evaluation are not within our control, particularly:
•
The possibility for continued or increasing price competition in
the highly competitive U.S. market;
•
Continued high fuel prices and the effect that may have on
consumer preferences related to our most profitable products,
fullsize
pick-up
trucks and sport utility vehicles;
•
Uncertainty over the effect on our cost structure from more
stringent U.S. fuel economy and global emissions standards
which may require us to sell higher volumes of alternative fuel
vehicles across our portfolio;
•
Uncertainty as to the future operating results of GMAC; and
•
Acceleration of tax deductions for OPEB liabilities as compared
to prior expectations due to changes associated with the
Settlement Agreement.
We recorded full valuation allowances against our net deferred
tax assets in the United States, Canada and Germany in the
quarter ended September 30, 2007 and in Spain and the
United Kingdom in the quarter ended March 31, 2008. With
regard to the United States, Canada, Germany, Spain and the
United Kingdom we continue to believe that full valuation
allowances are needed against our net deferred tax assets in
these tax jurisdictions.
If, in the future, we generate taxable income in the United
States, Canada, Germany, Spain and the United Kingdom on a
sustained basis, our conclusion regarding the need for full
valuation allowances in these tax jurisdictions could change,
resulting in the reversal of some or all of such valuation
allowances. If our U.S., Canadian, German, Spanish or United
Kingdom operations generate taxable income prior to reaching
profitability on a sustained basis, we would reverse a portion
of the valuation allowance related to the corresponding realized
tax benefit for that period, without changing our conclusions on
the need for a full valuation allowance against the remaining
net deferred tax assets.
In the quarter ended March 31, 2008 and the year to date
period ended June 30, 2008, we recognized income tax
expense on Loss from continuing operations before income taxes,
equity income and minority interests due to the effect of
valuation allowances totaling $379 million recorded against
our net deferred tax assets in the United Kingdom of
$173 million and Spain of $206 million, which is
discussed in more detail below. In the quarter and year to date
period ended June 30, 2008 we recognized income tax expense
on Loss from continuing operations before income taxes, equity
income and minority interests due to the impact of no longer
recording tax benefits for losses incurred in the United States,
Canada, Germany, Spain, and the United Kingdom, unless offset by
pretax income from other than continuing operations, based on
the valuation allowances established in the quarters ended
September 30, 2007 and March 31, 2008, as disclosed in
our 2007
10-K and
Quarterly Report on
Form 10-Q
for the period ended March 31, 2008, respectively.
In the quarter ended March 31, 2008, we determined that it
was more likely than not that we would not realize our net
deferred tax assets, in whole or in part, in Spain and the
United Kingdom and recorded full valuation allowances totaling
$379 million against our net deferred tax assets in these
tax jurisdictions. The following summarizes the significant
changes occurring in the three months ended March 31, 2008,
which resulted in our decision to record these full valuation
allowances.
In the United Kingdom, we are in a three-year adjusted
cumulative loss position and our near-term and mid-term
financial outlook for automotive market conditions is more
challenging than we believed in the quarter ended
December 31, 2007. Our outlook deteriorated based on our
projections of the combined effects of the challenging foreign
exchange environment and
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
unfavorable commodity prices. Additionally, we have increased
our estimate of the potential costs that may arise from the
regulatory and tax environment relating to carbon dioxide
(CO2)
emissions in the European Union, including legislation enacted
or announced in 2008.
In Spain, although we are not currently in a three-year adjusted
cumulative loss position our near-term and mid-term financial
outlook deteriorated significantly in the three months ended
March 31, 2008 such that we anticipate being in a
three-year adjusted cumulative loss position in the near- and
mid-term. In Spain, as in the United Kingdom, we are unfavorably
affected by the combined effects of the foreign exchange
environment and commodity prices, including our estimate of the
potential costs that may arise from the regulatory and tax
environment relating to
CO2
emissions.
At June 30, 2008 and December 31, 2007, the amount of
consolidated gross unrecognized tax benefits before valuation
allowances was $2.9 billion and $2.8 billion,
respectively, and the amount that would favorably affect the
effective income tax rate in future periods after valuation
allowances were $90 million and $68 million,
respectively. At June 30, 2007, the amount of gross
unrecognized tax benefits before valuation allowances and the
amount that would favorably affect the effective income tax rate
in future periods after valuation allowances were
$2.6 billion and $1.7 billion, respectively. These
amounts consider the guidance in
FSP No. 48-1,
“Definition of Settlement in FASB Interpretation
No. 48”
(FSP No. 48-1).
At June 30, 2008, $2.3 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.
We file income tax returns in multiple jurisdictions and are
subject to examination by taxing authorities throughout the
world. In the U.S., our federal income tax returns for 2001
through 2003 have been reviewed by the Internal Revenue Service,
and except for one transfer pricing matter, it is likely that
this examination will conclude in 2008. We have submitted
requests for Competent Authority assistance on the transfer
pricing matter. The Internal Revenue Service is currently
reviewing our 2004 through 2006 federal income tax returns. In
addition, our previously filed tax returns are currently under
review in Argentina, Australia, Belgium, Canada, Ecuador,
France, Germany, Greece, India, Indonesia, Italy, Japan, Korea,
Mexico, New Zealand, Russia, Spain, Switzerland, Taiwan,
Thailand, Turkey, the United Kingdom and Venezuela. Tax audits
in Mexico and the United Kingdom concluded during 2008. At
June 30, 2008 it is not possible to reasonably estimate the
expected change to the total amount of unrecognized tax benefits
over the next twelve months.
We have open tax years from primarily 1999 to 2007 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. We have recorded a tax benefit only for those
positions that meet the more likely than not standard.
Note 11. Fair
Value Measurements
In September 2006, the FASB issued SFAS No. 157 and in
February 2007, issued SFAS No. 159. Both standards
address aspects of the expanding application of fair value
accounting. Effective January 1, 2008, we adopted
SFAS No. 157 and SFAS No. 159. Pursuant to
the provisions of FSP
No. 157-2,
we have decided to defer adoption of SFAS No. 157 for
one year for nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. There was no adjustment to
Accumulated deficit as a result of our adoption of
SFAS No. 157. SFAS No. 159 permits an entity
to measure certain financial assets and financial liabilities at
fair value that were not previously required to be measured at
fair value. We have not elected to measure any financial assets
or financial liabilities at fair value which were not previously
required to be measured at fair value.
SFAS No. 157 provides for the following:
•
Defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date,
and establishes a framework for measuring fair value;
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
•
Establishes a three-level hierarchy for fair value measurements
based upon the observability of inputs to the valuation of an
asset or liability at the measurement date;
•
Requires consideration of our nonperformance risk when valuing
liabilities; and
•
Expands disclosures about instruments measured at fair value.
SFAS No. 157 also establishes a three-level valuation
hierarchy for fair value measurements. These valuation
techniques are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect our market
assumptions. These two types of inputs create the following fair
value hierarchy:
•
Level 1 — Quoted prices for identical
instruments in active markets;
•
Level 2 — Quoted prices for similar
instruments in active markets; quoted prices for identical
or similar instruments in markets that are not active; and
model-derived valuations whose significant inputs are
observable: and
•
Level 3 — Instruments whose significant inputs
are unobservable.
Following is a description of the valuation methodologies we
used for instruments measured at fair value, as well as the
general classification of such instruments pursuant to the
valuation hierarchy.
Securities
We classify our securities within Level 1 of the valuation
hierarchy where quoted prices are available in an active market.
Level 1 securities include exchange-traded equities. If
quoted market prices are not available, we determine the fair
values of our securities using pricing models, quoted prices of
securities with similar characteristics or discounted cash flow
models. These models are primarily industry-standard models that
consider various assumptions, including time value and yield
curve as well as other relevant economic measures. Examples of
such securities, which we would generally classify within
Level 2 of the valuation hierarchy, include
U.S. government and agency securities, certificates of
deposit, commercial paper, and corporate debt securities. In
certain cases where there is limited activity or less
observability to inputs to the valuation, we classify our
securities within Level 3 of the valuation hierarchy.
Inputs to the Level 3 security fair value measurements
consider various assumptions, including time value, yield curve,
prepayment speeds, default rates, loss severity, current market
and contractual prices for underlying financial instruments as
well as other relevant economic measures. Securities classified
within Level 3 include certain mortgage-backed securities,
certain corporate debt securities and other securities.
Derivatives
The majority of our derivatives are valued using internal models
that use as their basis readily observable market inputs, such
as time value, forward interest rates, volatility factors, and
current and forward market prices for commodities and foreign
exchange rates. We generally classify these instruments within
Level 2 of the valuation hierarchy. Such derivatives
include interest rate swaps, cross currency swaps, foreign
currency derivatives and commodity derivatives. We classify
derivative contracts that are valued based upon models with
significant unobservable market inputs as Level 3 of the
valuation hierarchy. Examples include certain long-dated
commodity purchase contracts and interest rate derivatives with
notional amounts that fluctuate over time. Models for these fair
value measurements include unobservable inputs based on
estimated forward rates and prepayment speeds.
SFAS No. 157 requires that the valuation of derivative
liabilities must take into account the company’s own
nonperformance risk. Effective January 1, 2008, we updated
our derivative liability valuation methodology to consider our
own nonperformance risk as observed through the credit default
swap market and bond market.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The tables below include the activity in the balance sheet
accounts for financial instruments classified within
Level 3 of the valuation hierarchy. When a determination is
made to classify a financial instrument within Level 3, the
determination is based upon the significance of the unobservable
inputs to the overall fair value measurement. Level 3
financial instruments typically include, in addition to the
unobservable or Level 3 components, observable components
which are validated to external sources.
Amount of total gains and (losses) for the period included in
earnings attributable to the change in unrealized gains or
(losses) relating to assets still held at the reporting date
$
(9
)
$
—
$
15
$
—
$
(12
)
$
(6
)
(a)
Realized gains (losses) and other than temporary impairments on
marketable securities are recorded in Automotive interest and
other non-operating income (expense), net.
(b)
Realized and unrealized gains (losses) on commodity derivatives
are recorded in Automotive cost of sales and changes in fair
value are attributable to changes in base metal and precious
metal prices.
Unrealized securities holding gains and losses are excluded from
earnings and reported in Other comprehensive income until
realized. Gains and losses are not realized until an instrument
is settled or sold. On a monthly basis, we evaluate whether
unrealized losses related to investments in debt and equity
securities are other than temporary. Factors considered in
determining whether a loss is other than temporary include the
length of time and extent to which the fair value has been below
cost, the financial condition and near-term prospects of the
issuer and our ability and intent to hold the investment for a
period of time sufficient to allow for any anticipated recovery.
If losses are determined to be other than temporary, the loss is
recognized and the investment carrying amount is adjusted to a
revised fair value. Other than temporary impairment losses of
$11 million and $28 million were recorded for the
quarter and year to date period ended June 30, 2008,
respectively.
Amount of total gains and (losses) for the period included in
earnings attributable to the change in unrealized gains or
(losses) relating to assets still held at the reporting date
$
(9
)
$
—
$
134
$
—
$
(32
)
$
93
(a)
Realized gains (losses) and other than temporary impairments on
marketable securities are recorded in Automotive interest and
other non-operating income (expense), net.
(b)
Reflects fair value of Interest rate swap derivative assets, net
of liabilities.
(c)
Realized and unrealized gains (losses) on commodity derivatives
are recorded in Automotive cost of sales and changes in fair
value are attributable to changes in base metal and precious
metal prices.
The following table presents the financial instruments measured
at fair value on a nonrecurring basis in periods subsequent to
initial recognition:
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In accordance with the provisions of APB No. 18, “The
Equity Method of Accounting for Investments in Common
Stock” (APB No. 18), we review the carrying values of
our investments when events and circumstances warrant. This
review requires the comparison of the fair values of our
investments to their respective carrying values. The fair value
of our investments is determined based on valuation techniques
using the best information that is available, and may include
quoted market prices, market comparables, and discounted cash
flow projections. An impairment loss would be recorded whenever
a decline in fair value below the carrying value is determined
to be other than temporary.
At December 31, 2007 we disclosed that we did not believe
our investment in GMAC was impaired however, there were many
economic factors which were unstable at that time. Such factors
included the instability of the global credit and mortgage
markets, deteriorating conditions in the residential and home
building markets, and credit downgrades of GMAC and GMAC’s
Residential Capital, LLC (ResCap). In the quarter ended
March 31, 2008, the instability in the global credit and
mortgage markets increased, and the residential and home
building markets continued to deteriorate. Additionally, it was
necessary for GMAC to continue to provide funding and capital
infusions to ResCap, and GMAC’s and ResCap’s credit
ratings were further downgraded.
As a result of these factors, we reevaluated our investment in
GMAC Common and Preferred Membership Interests for possible
impairment. Accordingly, our investment in GMAC Common
Membership Interests, with a pre-impairment carrying amount of
$6.7 billion at March 31, 2008, was written down to
its estimated fair value of $5.4 billion at March 31,2008, after considering the impact of recording our share of
GMAC’s results for the quarter ended March 31, 2008.
The resulting impairment charge of $1.3 billion was
recorded in Equity in loss of GMAC LLC. Additionally, our
investment in GMAC Preferred Membership Interests, with a
pre-impairment carrying amount of $1.0 billion at
March 31, 2008, was written down to its estimated fair
value of $902 million at March 31, 2008. The resulting
impairment charge of $142 million was recorded in
Automotive interest income and other non-operating income
(expense), net.
In the quarter ended June 30, 2008 a decline in consumer
demand for automobiles, particularly
pick-up
trucks and sport utility vehicles, negatively impacted
GMAC’s North American automotive business, including
impairment of the vehicles on operating leases due to the
decline in residual values. The instability of the global credit
and mortgage markets continued in the quarter ended
June 30, 2008, and increased in Europe, which caused
significant losses at ResCap. As a result of these factors, we
reevaluated our investment in GMAC Common and Preferred
Membership Interests for possible impairment. Accordingly, our
investment in GMAC Common Membership Interests, with a
pre-impairment carrying amount of $4.2 billion at
June 30, 2008, was written down to its estimated fair value
of $3.5 billion at June 30, 2008, after considering
the impact of recording our share of GMAC’s results for the
quarter ended June 30, 2008. The resulting impairment
charge of $726 million was recorded in Equity in loss of
GMAC LLC. Our investment in GMAC Preferred Membership Interests,
with a pre-impairment carrying amount of $902 million at
June 30, 2008, was written down to its estimated fair value
of $294 million at June 30, 2008. The resulting
impairment charge of $608 million was recorded in
Automotive interest income and other non-operating income
(expense), net.
Continued or decreased demand for automobiles, and continued or
increased instability of the global credit and mortgage markets
could further negatively impact GMAC’s lines of businesses,
and result in future impairments of our investment in GMAC
Common and Preferred Membership Interests.
In order to determine the fair value of our investment in GMAC
Common Membership Interests, we first determined a fair value of
GMAC by applying various valuation techniques to its significant
business units, and then applied our 49% equity interest to the
resulting fair value. Our determination of the fair value of
GMAC encompassed applying valuation techniques, which included
Level 3 inputs, to GMAC’s significant business units
as follows:
•
Auto Finance — We obtained industry data, such as
equity and earnings ratios for other industry participants, and
developed average multiples for these companies based upon a
comparison of their businesses to Auto Finance.
•
Insurance — We developed a peer group, based upon such
factors as equity and earnings ratios and developed average
multiples for these companies.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
•
ResCap — We obtained industry data for an industry
participant who we believe to be comparable, and also utilized
the implied valuation based on an acquisition of an industry
participant who we believe to be comparable.
•
Commercial Finance Group — We obtained industry data,
such as price and earnings ratios, for other industry
participants, and developed average multiples for these
companies based upon a comparison of their businesses to the
Commercial Finance Group.
In order to determine the fair value of our investment in GMAC
Preferred Membership Interests, we applied valuation techniques,
which included Level 3 inputs, to various characteristics
of the GMAC Preferred Membership Interests as follows:
•
Utilizing information as to the pricing on similar investments
and changes in yields of other GMAC securities, we developed a
discount rate for the valuation.
•
Utilizing assumptions as to the receipt of dividends on the GMAC
Preferred Membership Interests, the expected call date and a
discounted cash flow model, we developed a present value of the
related cash flows.
At June 30, 2008 we adjusted our assumptions as to the
appropriate discount rate to utilize in the valuation due to the
changes in the market conditions which occurred in the quarter
ended June 30, 2008. Additionally, we adjusted our
assumptions as to the likelihood of payments of dividends and
expected call date of the Preferred Membership Interests.
Note 12. GMNA Postemployment Benefit Costs
As previously discussed in our 2007
10-K, the
majority of our hourly employees working within GMNA are
represented by various labor unions. We have specific labor
contracts with each union, some of which require us to pay idled
employees certain wage and 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 our best estimate of the wage and benefit costs
to be incurred. Costs related to the idling of employees that
are expected to be temporary are expensed as incurred. We review
the adequacy and continuing need for these liabilities on a
quarterly basis in conjunction with our quarterly production and
labor forecasts. As a result of the 2008 Special Attrition
Programs and other facility idling announcements in the quarter
and year to date period ended June 30, 2008, we recorded
$1.3 billion of additional postemployment benefit costs in
accordance with SFAS No. 112, “Employer’s
Accounting for Postemployment Benefits”
(SFAS No. 112). Refer to Note 8.
Activity for postemployment benefit costs is as follows:
We have executed various restructuring and other initiatives and
may execute additional initiatives in the future to align
manufacturing capacity to prevailing global automotive
production and to improve the utilization of remaining
facilities. Such initiatives may include facility idlings,
consolidation of operations and functions, production
relocations or reductions and voluntary and involuntary employee
separation programs. Estimates of restructuring and other
initiative charges are based on information available at the
time such charges are recorded. Due to the inherent uncertainty
involved, actual amounts paid for such activities may differ
from amounts initially recorded. Accordingly, we may revise
previous estimates.
The following table summarizes our restructuring and other
initiative charges:
Refer to Note 12 for further discussion of postemployment
benefits costs related to hourly employees of GMNA, and
Note 8 for pension and other postretirement benefit charges
related to our hourly employee separation initiatives.
2008
Activities
The following table details the components of our restructuring
charges by segment in the quarter ended June 30, 2008:
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table details the components of our restructuring
charges by segment in the year to date period ended
June 30, 2008:
Corporate and
GMNA
GME
GMLAAM
GMAP
Other
Total
(Dollars in millions)
Separation costs
$
2
$
223
$
6
$
61
$
—
$
292
Other
—
(21
)
—
—
—
(21
)
Total restructuring charges
$
2
$
202
$
6
$
61
$
—
$
271
GMNA recorded restructuring charges of $1 million and
$2 million in the quarter and year to date period ended
June 30, 2008, respectively. These charges related to a
U.S. salaried severance program, which allows involuntarily
terminated employees to receive ongoing wages and benefits for
no longer than 12 months.
GME recorded net restructuring charges of $79 million and
$202 million in the quarter and year to date period ended
June 30, 2008, respectively. These charges were related to
the following restructuring initiatives:
•
In the quarter and year to date period ended June 30, 2008,
GME recorded restructuring charges of $27 million and
$100 million, respectively, for retirement programs, along
with additional minor separations under other current programs
in Germany. Approximately 4,600 employees will leave under early
retirement programs in Germany through 2013. The total remaining
cost for the early retirements will be recognized over the
remaining required service period of the employees.
•
In the quarter ended June 30, 2007, we announced additional
separation programs at the Antwerp, Belgium facility. These
programs impact 1,900 employees, who will leave through August
2008, and have total estimated costs of $440 million. Of
this amount, we recorded $35 million and $80 million
in the quarter and year to date period ended June 30, 2008,
respectively. In 2007 we recorded $353 million in
connection with these separation programs. The remaining cost of
the Antwerp, Belgium program will be recognized over the
remaining required service period of the employees through
August 2008.
•
In the quarter ended June 30, 2008, we announced separation
programs at the Strasbourg, France facility. In the quarter and
year to date period ended June 30, 2008, we recorded
restructuring charges of $16 million.
•
The remaining $22 million and $27 million in
separation charges reported in the quarter and year to date
period ended June 30, 2008, respectively, relate to the
cost of initiatives previously announced. These include
voluntary separations in Sweden and the United Kingdom.
•
Additionally, GME reversed accruals for $21 million in the
quarter and year to date period ended June 30, 2008
associated with the favorable resolution of claims by the
government of Portugal filed in conjunction with the plant
closure in Azambuja in 2006.
GMLAAM recorded restructuring charges of $3 million and
$6 million in the quarter and the year to date period ended
June 30, 2008, respectively. These charges related to
separation programs in South Africa and Chile.
GMAP recorded restructuring charges of $61 million in the
quarter and year to date period ended June 30, 2008. The
charge was related to a facility idling at GM Holden, Ltd. (GM
Holden), which manufactures FAM II 4 cylinder engines. The
program will impact 645 employees, who will leave through
December 2009, and has total estimated costs of
$67 million. The remaining cost of this program will be
recognized over the remaining required service period of the
employees.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2007
Activities
The following table details the components of our restructuring
charges by segment in the quarter ended June 30, 2007:
Corporate and
GMNA
GME
GMLAAM
GMAP
Other
Total
(Dollars in millions)
Separation costs
$
3
$
30
$
18
$
1
$
—
$
52
Other
—
—
—
—
—
—
Total restructuring charges
$
3
$
30
$
18
$
1
$
—
$
52
The following table details the components of our restructuring
charges by segment in the year to date period ended
June 30, 2007:
Corporate and
GMNA
GME
GMLAAM
GMAP
Other
Total
(Dollars in millions)
Separation costs
$
5
$
87
$
18
$
41
$
—
$
151
Other
—
—
—
—
—
—
Total restructuring charges
$
5
$
87
$
18
$
41
$
—
$
151
GMNA recorded restructuring charges of $3 million and
$5 million in the quarter and year to date period ended
June 30, 2007, respectively. The charges were related to a
U.S. salaried severance program as described in more detail
above.
GME recorded charges relating to separation programs of
$30 million and $87 million in the quarter and year to
date period ended June 30, 2007, respectively. These
charges were related to the following restructuring initiatives:
•
In the quarter and year to date period ended June 30, 2007,
GME recorded charges in Germany of $27 million and
$70 million, respectively. These charges primarily related
to early retirement programs, along with additional minor
separations under other programs in Germany as described in more
detail above.
•
The remaining $3 million in separation charges reported in
the quarter ended June 30, 2007 relate to initiatives in
Belgium. The remaining $17 million in separation charges
reported in the year to date period ended June 30, 2007
also relate to initiatives announced in Sweden and the United
Kingdom.
GMLAAM recorded restructuring charges of $18 million in the
quarter and year to date period ended June 30, 2007 for
employee separations at General Motors do Brasil Ltd. (GM do
Brasil). These initiatives were announced and completed in the
quarter ended June 30, 2007 and resulted in the separation
of 600 employees.
GMAP recorded charges of $1 million and $41 million in
the quarter and year to date period ended June 30, 2007,
respectively. The charges were related to a voluntary employee
separation program at GM Holden, which was announced in the
quarter ended March 31, 2007. This initiative reduces the
facility’s workforce by 650 employees as a result of
increased plant operational efficiency.
Note 14. Impairments
We periodically review the carrying value of our long-lived
assets to be held and used when events and circumstances warrant
and in conjunction with the annual business planning cycle. If
the carrying value of a long-lived asset or asset group is
considered impaired, an impairment charge is recorded for the
amount by which the carrying amount exceeds fair market value.
Fair market value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
involved. Product-specific assets may become impaired as a
result of declines in profitability due to changes in volume,
pricing or costs. Impairment charges related to automotive
assets are recorded in Automotive cost of sales. Refer to
Note 13 for additional detail on restructuring and other
initiatives.
We periodically review the carrying value of our portfolio of
equipment on operating leases for impairment when events and
circumstances warrant and in conjunction with our quarterly
review of residual values and associated depreciation rates. If
the carrying value is considered impaired, an impairment charge
is recorded for the amount by which the carrying value exceeds
the fair market value. Fair market value is determined primarily
using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Impairment charges are
recorded in Financial services and insurance expense.
In addition, we test our goodwill for impairment annually and
when an event occurs or circumstances change such that it is
reasonably possible that impairment may exist. The annual
impairment test requires the identification of our reporting
units and a comparison of the fair value of each of our
reporting units to the respective carrying value. The fair value
of our reporting units is determined based on valuation
techniques using the best information that is available,
primarily discounted cash flow projections. If the carrying
value of a reporting unit is greater than the fair value of the
reporting unit then impairment may exist.
Our impairment charges in the quarters and year to date periods
ended June 30, 2008 and 2007 are as follows:
Long-lived asset impairments related to restructuring initiatives
$
28
$
—
Other long-lived asset impairments
—
14
Equipment on operating leases, net
105
—
Total
$
133
$
14
2008
Impairments
GMAP recorded $28 million of long-lived asset impairment
charges related to restructuring initiatives at GM Holden in the
quarter and year to date period ended June 30, 2008.
In the quarter ended June 30, 2008, FIO recorded
$105 million of impairment charges related to our portfolio
of equipment on operating leases. The impairment charge was the
result of our regular review of residual values related to these
leased assets. In the quarter ended June 30, 2008, residual
values of sport utility vehicles and fullsize
pick-up
trucks experienced a sudden and significant decline as a result
of a shift in customer preference to passenger cars and
crossover vehicles and away from sport
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
utility vehicles and fullsize pick-up trucks. This decline in
residual values was the primary reason for the impairment charge.
2007
Impairments
GMAP recorded $14 million of long-lived asset impairment
charges in the quarter and year to date period ended
June 30, 2007, related to the cessation of production VZ
Commodore passenger car derivatives at GM Holden.
Note 15. Earnings
(Loss) Per Share
Basic and diluted earnings (loss) per share have been computed
by dividing Income (loss) from continuing operations by the
weighted average number of shares outstanding during the period.
The amounts used in the basic and diluted earnings (loss) per
share computations are as follows:
Incremental effect of shares from exercise of stock options and
vesting of restricted stock units
—
3
—
3
Average number of dilutive shares outstanding
566
569
566
569
Basic income (loss) per share from continuing operations
$
(27.33
)
$
1.38
$
(33.07
)
$
1.31
Incremental effect of exercise of stock options and vesting of
restricted stock units
—
(.01
)
—
(.01
)
Diluted income (loss) per share from continuing operations
$
(27.33
)
$
1.37
$
(33.07
)
$
1.30
Certain stock options with exercise prices that exceed the fair
market value of our common stock have an antidilutive effect and
therefore were excluded from the computation of diluted earnings
(loss) per share. The number of such options not included in the
computation of diluted earnings (loss) per share was
101 million and 93 million at June 30, 2008 and
2007, respectively.
No shares potentially issuable to satisfy the
in-the-money
amount of our convertible debentures have been included in the
computation of diluted earnings (loss) per share for the
quarters and year to date periods ended June 30, 2008 and
2007 as our various series of convertible debentures were not
in-the-money.
On March 6, 2007, Series A convertible debentures in
the amount of $1.1 billion were put to us and settled
entirely in cash. At June 30, 2008 and 2007, the principal
amount of outstanding Series A convertible debentures was
$39 million.
Note 16. Transactions
with GMAC
We have entered into various operating and financing
arrangements with GMAC as more fully described in our 2007
10-K. The
following describes the financial statement effects at
June 30, 2008, December 31, 2007 and June 30,2007 and for the quarters and the year to date periods ended
June 30, 2008 and 2007 which are included in our condensed
consolidated financial statements.
Note payable balance, secured by the assets transferred
$
35
$
35
$
406
In the quarter ended June 30, 2008, residual values of
sport utility vehicles and fullsize pick-up trucks experienced a
sudden and significant decline as a result of a shift in
customer preference to passenger cars and crossover vehicles and
away from sport utility vehicles. This decline in residual
values is the primary factor responsible for the impairment
charge of $716 million and $105 million recorded by
GMAC and us, respectively, in the quarter ended June 30,2008 related to equipment on operating leases. The determination
of vehicle residual values is a significant assumption in these
impairment analyses and in the determination of amounts to
accrue under the residual support and risk sharing agreements
discussed above. It is reasonably possible that vehicle residual
values could decline in the future and that we or GMAC may be
required to record further impairment charges, which may be
material. In addition, it is reasonably possible that such
declines in residual values may result in increases in required
payments under the residual support and risk sharing agreements
discussed above.
On June 4, 2008, we, along with Cerberus ResCap Financing
LLC (Cerberus Fund) entered into a Participation Agreement
(Participation Agreement) with GMAC. The Participation Agreement
provides that we will fund up to $368 million in loans made
by GMAC to ResCap through a $3.5 billion secured loan
facility GMAC has provided to ResCap (ResCap Facility), and
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
that the Cerberus Fund will fund up to $382 million. The
ResCap Facility expires on May 1, 2010, and all funding
pursuant to the Participation Agreement is to be done on a
pro-rata basis between us and the Cerberus Fund.
We and the Cerberus Fund are required to fund our respective
portions of the Participation Agreement when the amount
outstanding pursuant to the ResCap Facility exceeds
$2.75 billion, unless a default event has occurred, in
which case we and the Cerberus Fund are required to fund our
respective maximum obligations. Amounts funded by us and the
Cerberus Fund pursuant to the Participation Agreement are
subordinate to GMAC’s interest in the ResCap Facility, and
all principal payments remitted by ResCap under the ResCap
Facility are applied to GMAC’s outstanding balance, until
such balance is zero. Principal payments remitted by ResCap
while GMAC’s outstanding balance is zero are applied on a
pro-rata basis to us and the Cerberus Fund.
The ResCap Facility is secured by various assets held by ResCap
and its subsidiaries, and we are entitled to receive interest at
LIBOR plus 2.75% for the amount we have funded pursuant to the
Participation Agreement. In addition, we and the Cerberus Fund
are also entitled to receive our pro-rata share of the 1.75%
interest on GMAC’s share of the total outstanding balance.
At June 30, 2008, ResCap had fully drawn down the maximum
amount pursuant to the ResCap Facility, and we had funded our
maximum obligation of $368 million, which is recorded in
Equity in net assets of non consolidated affiliates.
Unsecured
Obligations
An agreement between GMAC and us limits certain of our unsecured
obligations to GMAC arising from specific operating and
financing arrangements in the United States to
$1.5 billion, estimated in good faith. As a result of the
recent market developments, including a decline in residual
values of sport utility vehicles and full size
pick-up
trucks, the current estimate of our pertinent obligations
exceeded the cap. In response, on August 6, 2008, we paid
GMAC $646 million representing prepayment of the
obligations included in the estimate of total liabilities
subject to the cap.
Balance
Sheet
A summary of the balance sheet effects of transactions with GMAC
is as follows:
Equity in net assets of nonconsolidated affiliates (c)
$
368
$
—
$
—
Liabilities:
Accounts payable (d)
$
516
$
548
$
621
Short-term borrowings and current portion of long-term
debt (e)
$
2,646
$
2,802
$
2,870
Accrued expenses (f)
$
3,430
$
2,134
$
1,924
Long-term debt (g)
$
104
$
119
$
366
(a)
Represents wholesale settlements due from GMAC, as well as
amounts owed by GMAC with respect to the Equipment on operating
leases, net transferred to us, and the exclusivity fee and
royalty arrangement.
(b)
Primarily represents distributions due from GMAC on our
Preferred Membership Interests.
(c)
Represents amounts funded pursuant to the Participation
Agreement.
(d)
Primarily represents amounts accrued for interest rate support,
capitalized cost reduction, residual support and lease
pull-ahead programs and the risk sharing arrangement.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(e)
Represents wholesale financing, sales of receivable transactions
and the short-term portion of term loans provided to certain
dealerships which we own or in which we have an equity interest.
In addition, it includes borrowing arrangements with GME
locations and arrangements related to GMAC’s funding of our
company-owned vehicles, rental car vehicles awaiting sale at
auction and funding of the sale of our vehicles in which we
retain title while the vehicles are consigned to GMAC or
dealers, primarily in the United Kingdom. Our financing remains
outstanding until the title is transferred to the dealers. This
amount also includes the short-term portion of a note provided
to our wholly-owned subsidiary holding debt related to the
Equipment on operating leases, net transferred to us from GMAC.
(f)
Primarily represents accruals for marketing incentives on
vehicles which are sold, or anticipated to be sold, to customers
or dealers and financed by GMAC in the U.S. This includes the
estimated amount of residual support accrued under the residual
support and risk sharing programs, rate support under the
interest rate support programs, operating lease and finance
receivable capitalized cost reduction incentives paid to GMAC to
reduce the capitalized cost in automotive lease contracts and
retail automotive contracts, and costs under lease pull-ahead
programs. In addition it includes interest accrued on the
transactions in (e) above.
(g)
Primarily represents the long-term portion of term loans and a
note payable with respect to the Equipment on operating leases,
net transferred to us mentioned in (e) above.
Statement
of Operations
A summary of the income statement effects of transactions with
GMAC is as follows:
Automotive interest income and other non-operating income
(expense), net (c)
$
85
$
105
$
172
$
212
Interest expense (d)
$
59
$
73
$
114
$
153
Servicing expense (e)
$
22
$
45
$
50
$
95
Derivative gain (loss) (f)
$
(6
)
$
6
$
(1
)
$
1
(a)
Primarily represents the reduction in net sales and revenues for
marketing incentives on vehicles which are sold, or anticipated
to be sold, to customers or dealers and financed by GMAC in the
U.S. This includes the estimated amount of residual support
accrued under the residual support and risk sharing programs,
rate support under the interest rate support programs, operating
lease and finance receivable capitalized cost reduction
incentives paid to GMAC to reduce the capitalized cost in
automotive lease contracts and retail automotive contracts, and
costs under lease pull-ahead programs. This amount is offset by
net sales for vehicles sold to GMAC for employee and
governmental lease programs and third party resale purposes.
(b)
Primarily represents cost of sales on the sale of vehicles to
GMAC for employee and governmental lease programs and third
party resale purposes. Also includes miscellaneous expenses for
services performed for us by GMAC.
(c)
Represents income or loss on our Preferred Membership Interests
in GMAC, interest earned on amounts outstanding under the
Participation Agreement, exclusivity and royalty fee income and
reimbursements by GMAC for certain services we provided.
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.
(d)
Represents interest incurred on term loans, notes payable and
wholesale settlements.
(e)
Represents servicing fees paid to GMAC on the automotive leases
we retained.
(f)
Represents gains and losses recognized in connection with a
derivative transaction entered into with GMAC as the
counterparty.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 17. Segment
Reporting
We operate in two businesses, consisting of GM Automotive (or
GMA) and FIO. Our four automotive segments consist of GMNA, GME,
GMLAAM and GMAP. We manufacture our cars and trucks in 35
countries under the following brands: Buick, Cadillac,
Chevrolet, GMC, GM Daewoo, Holden, HUMMER, Opel, Pontiac, Saab,
Saturn, Vauxhall and Wuling. Our FIO business consists of our
49% share of GMAC’s operating results, which we account for
under the equity method, and Other Financing, which is comprised
primarily of two special purpose entities holding automotive
leases previously owned by GMAC and its affiliates that we
retained, and the elimination of inter-segment transactions
between GM Automotive and Corporate and Other.
Corporate and Other includes the elimination of inter-segment
transactions, certain non-segment specific revenues and
expenses, including costs related to postretirement benefits for
Delphi and other retirees and certain corporate activities.
Amounts presented in Automotive sales, Interest income and
Interest expense in the tables that follow principally relate to
the inter-segment transactions eliminated at Corporate and
Other. All inter-segment balances and transactions have been
eliminated in consolidation.
In the quarter ended December 31, 2007, we changed our
measure of segment profitability from net income to income
before income taxes plus equity income, net of tax and minority
interests, net of tax. Amounts for the quarter and year to date
period ended June 30, 2007 have been revised to reflect
these periods on a comparable basis for the changes discussed
above. Additionally, 2007 amounts have been reclassified for the
retroactive effect of discontinued operations as discussed in
Note 3.
In the quarter ended June 30, 2008 we determined that GM
Daewoo Auto & Technology Company (GM Daewoo), our
50.9% owned and consolidated Korean subsidiary, included in our
GMAP segment, had been applying hedge accounting to certain
derivative contracts designated as cash flow hedges of
forecasted sales without fully considering whether these sales
were at all times probable of occurring. Under
SFAS No. 133, gains and losses on derivatives used to
hedge a probable forecasted transaction are deferred as a
component of Other comprehensive income and reclassified into
earnings in the period the forecasted transaction occurs. Gains
and losses on derivatives related to forecasted transactions
that are not probable of occurring are required to be recorded
in current period earnings. In the quarter ended June 30,2008, we corrected our previous accounting by recognizing in
Automotive sales $407 million of losses ($262 million
in income (loss) from continuing operations before income taxes
and $150 million after-tax and after minority interests) on
these derivatives which had been inappropriately deferred in
Accumulated other comprehensive income. Approximately
$250 million ($163 million in income (loss) from
continuing operations before income taxes and $93 million
after-tax and after minority interests) should have been
recognized in earnings in the quarter ended March 31, 2008,
and the remainder should have been recognized in prior periods,
predominantly in 2007. We have not restated our condensed
consolidated financial statements or prior annual financial
statements because we have concluded that the effect of
correcting for this item and other minor
out-of-period
adjustments is not material to the current quarter and to each
of the earlier periods.
Income (loss) from continuing operations before income taxes,
equity income and minority interest
$
(309
)
$
314
$
550
$
376
$
(8
)
$
923
$
(789
)
$
134
$
20
$
140
$
160
$
294
Equity income (loss), net of tax
40
20
14
249
1
324
2
326
—
—
—
326
Minority interests, net of tax
(27
)
(15
)
(14
)
(202
)
—
(258
)
(1
)
(259
)
—
—
—
(259
)
Income (loss) from continuing operations before income taxes
$
(296
)
$
319
$
550
$
423
$
(7
)
$
989
$
(788
)
$
201
$
20
$
140
$
160
$
361
Income from discontinuing operations, net of tax
$
211
$
—
$
—
$
—
$
—
$
211
$
—
$
211
$
—
$
—
$
—
$
211
Expenditures for property
$
1,939
$
359
$
79
$
433
$
27
$
2,837
$
46
$
2,883
$
—
$
1
$
1
$
2,884
(a)
Corporate and Other recorded charges of $2.8 billion and
$3.5 billion in the quarter and year to date period ended
June 30, 2008, respectively, to increase our net liability
related to the Benefit Guarantee Agreements, primarily due to
expectations of increased obligations and updated estimates
reflecting the uncertainty around the nature, value and timing
of our recoveries upon Delphi’s emergence from bankruptcy.
Corporate and Other recorded charges of $575 million in the
quarter and year to date period ended June 30, 2007 for our
estimated liabilities under the Benefit Guarantee Agreements and
Delphi-GM Settlement Agreements.
(b)
Other Financing also includes the elimination of net receivables
from total assets. Receivables eliminated at June 30, 2008
and 2007 were $4.4 billion and $4.1 billion,
respectively.
(c)
We sold a 51% equity interest in GMAC in November 2006. The
remaining 49% equity interest is accounted for under the equity
method and is included in the GMAC segment’s assets. Refer
to Notes 5 and 16 for summarized financial information of
GMAC at and for the quarters and periods ended June 30,2008 and 2007.
Note 18. Subsequent
Events
Liquidity
Initiatives
On July 15, 2008, we announced a number of initiatives
aimed to conserve cash and strengthen our financial condition.
Included in our announcement was a plan to reduce U.S. salaried
employment costs by 20%, resulting in projected cash savings of
$1.5 billion in 2009. This salaried employment cost
reduction will take place in part through salaried headcount
reductions in the U.S. and Canada through early retirements,
normal attrition and separation programs, including a voluntary
early retirement program we intend to offer in the U.S. and
Canada in the quarter ending September 30, 2008. We
anticipate the acceptance period, as well as the date of the
employees’ voluntary retirements, will occur in the quarter
ending December 31, 2008. Total cost of the separations
will depend upon a number of factors, including the demographics
of the affected employees and the
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
separation benefits they will receive, if any. The cost will
likely exceed $300 million in the year ending
December 31, 2008, a portion of which we expect will be
paid out of our overfunded U.S. salaried pension plan.
Additional cash savings will be achieved through the elimination
of health care coverage for U.S. salaried retirees over 65
beginning January 1, 2009. In order to help offset the cost
of Medicare and supplemental coverage, affected retirees will
receive a monthly increased pension benefit from the currently
overfunded U.S. salaried pension plan. These benefit plan
changes are currently estimated to result in a reduction of the
APBO for the U.S. salaried retiree healthcare plan in the range
of $3.8 billion to $4.2 billion and an increase in the
PBO of the U.S. salaried pension plan in the range of
$3.4 billion to $3.8 billion, depending on certain
factors, including the discount rate used to remeasure the
plans. We anticipate annual cash savings of $500 million as
a result of these actions.
As allowed by the Settlement Agreement and consented to by the
Class Counsel, we are deferring approximately
$1.7 billion of payments contractually required under the
Settlement Agreement to the New VEBA, including interest on the
Convertible Note, which would have been payable to the temporary
asset account in 2008 and 2009. These payments are deferred
until 2010 and will be increased by an annual interest factor of
9%.
Further reductions in truck capacity and related component,
stamping and powertrain capacity will be made in order to
achieve an approximate 300,000 unit reduction by the end of
2009. Half of this reduction is expected to be achieved from an
acceleration of previously announced capacity actions and the
remaining half from new capacity actions. We subsequently
announced on July 28, 2008 the elimination of a shift at
our Moraine, Ohio facility, which is an acceleration of its
previously announced idling by 2010, as well as a shift
elimination at our Shreveport, Louisiana facility. It is
expected that these capacity reductions will generate additional
postemployment benefit charges as well as possible curtailments
of certain hourly benefit plans. We are not currently able to
reasonably estimate the charge associated with these expected
future capacity reductions, as we are in the process of
determining the specific actions we will take to achieve these
future capacity reductions.
Approval
of Settlement Agreement
On July 31, 2008 the United States District Court for the
Eastern District of Michigan announced its decision approving
the Settlement Agreement as discussed in Note 8. Before the
Settlement Agreement can become effective, all legal appeals
must be exhausted and the discussions between us and the SEC
regarding the accounting treatment for the Settlement Agreement
must be completed on a basis we find to be reasonably
satisfactory.
Borrowings
Against Credit Facility
As of August 1, 2008, we borrowed $1.0 billion against
our $4.5 billion U.S. committed credit facility. Under this
secured facility, borrowings are limited to an amount based on
the value of the underlying collateral, which consists of
certain North American accounts receivables and inventory of GM,
Saturn Corporation and General Motors of Canada Limited (GM
Canada), certain facilities, property and equipment of GM Canada
and a pledge of 65% of the stock of the holding company for our
indirect subsidiary General Motors de Mexico, S de R.L. de C.V.
Settlement
of the General Motors Securities Litigation
In July 2008 we reached a tentative settlement of the General
Motors Securities Litigation suit and recorded a charge of
$277 million in the quarter ended June 30, 2008. We
believe that a portion of our settlement costs are covered by
insurance. We anticipate recording income of approximately
$200 million in the third quarter of 2008 associated with
insurance-related indemnification proceeds for previously
recorded litigation related costs, including the cost incurred
to settle the General Motors Securities Litigation suit.
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) should be read
in conjunction with the accompanying condensed consolidated
financial statements and in conjunction with our Annual Report
on
Form 10-K
for the year ended December 31, 2007 (2007
10-K).
We operate in two businesses, consisting of Automotive (GM
Automotive or GMA) and Financing and Insurance Operations (FIO).
We are engaged primarily in the worldwide development,
production and marketing of automobiles. We develop, manufacture
and market vehicles worldwide through four automotive segments:
GM North America (GMNA), GM Europe (GME), GM Latin
America/Africa/Mid-East (GMLAAM) and GM Asia Pacific (GMAP).
Also, our FIO operations are primarily conducted through GMAC
LLC (GMAC). We own a 49% equity interest in GMAC that is
accounted for under the equity method of accounting. 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. FIO also includes Other
Financing, which includes financing entities that are not
consolidated by GMAC and two special purpose entities holding
automotive leases previously owned by GMAC and its affiliates
that we retained having a net book value of $2.5 billion,
as well as the elimination of intercompany transactions with GMA
and Corporate and Other.
In the quarter ended December 31, 2007, we changed our
measure of segment profitability from net income to income
before income taxes plus equity income, net of tax and minority
interests, net of tax. Amounts for the quarter and year to date
period ended June 30, 2007 have been revised to reflect
these periods on a comparable basis for the changes discussed
above. In addition, 2007 amounts have been reclassified for the
retroactive effect of discontinued operations due to the August
2007 sale of Allison Transmission (Allison) as discussed in
Note 3 to the condensed consolidated financial statements.
Historically, Allison was included in GMNA.
Consistent with industry practice, our market share information
includes estimates of industry vehicle sales in certain
countries where public reporting is not legally required or
otherwise available on a consistent basis.
The following provides a summary of significant results and
events in the quarter and year to date period ended
June 30, 2008, as well as an update from our 2007
10-K of the
global automotive industry, including current market challenges,
2008 priorities, key factors affecting future and current
results and our North American Turnaround Plan.
Quarter
and Year to Date Period Ended June 30, 2008
Overview
As more fully described in this MD&A, the following
significant items are noted regarding the quarter and year to
date period ended June 30, 2008:
•
Total net sales and revenue
•
Second quarter — Total net sales and revenues declined
by 18.3%
•
Year to date — Total net sales and revenues declined
by 10.3%
•
Automotive sales
•
Second quarter — Automotive sales declined 17.7%
reflecting growth at GME and GMLAAM, offset by significantly
lower revenues at GMNA
•
Year to date — Automotive sales declined 9.6%
reflecting growth at GMAP, GME and GMLAAM, offset by
significantly lower revenues at GMNA
•
Net loss
•
Second quarter — Net loss of $15.5 billion
($27.33 per share)
•
Year to date — Net loss of $18.7 billion ($33.07
per share)
•
Impairment of investment in GMAC Common and Preferred Membership
Interests
•
Second quarter — Impairment charges of
$1.3 billion recorded
•
Year to date — Impairment charges of $2.8 billion
recorded
Second quarter — Additional charges of
$2.8 billion recorded
•
Year to date — Total charges of $3.5 billion
recorded
•
Second quarter — Significant decline in lease residual
values resulting in $2.0 billion in charges
•
Second quarter — 2008 Special Attrition Programs
result in curtailment and related charges of $3.3 billion
and 18,700 hourly employees leaving active employment
•
Second quarter — Recorded charges of $1.1 billion
related to announced capacity actions in the U.S. and Canada
•
Second quarter — Announced significant capacity,
operational and liquidity actions to realign our U.S. operations
with current U.S. economic and market conditions
•
Second quarter — American Axle and Manufacturing
Holdings, Inc. (American Axle) work stoppage settled and
$0.2 billion to be funded to assist in worker buyouts,
retirements and wage buydowns
•
Second quarter — New labor agreement reached with
Canadian Auto Workers Union (CAW) resulting in related charges
of $0.3 billion
Global
Automotive Industry
In the quarter and year to date period ended June 30, 2008,
the global automotive industry continued to show strong sales
and revenue growth outside of North America. Global industry
vehicle sales to retail and fleet customers were
18.5 million vehicles in the second quarter of 2008,
representing a 1.6% increase compared to the corresponding
period in 2007. Year to date industry vehicle sales in 2008
totaled 36.6 million vehicles compared to 35.7 million
vehicles in the corresponding period in 2007. We expect industry
vehicle sales to be approximately 73.0 million vehicles in
2008 compared to 70.6 million vehicles in 2007. In recent
years, the global automotive industry has experienced consistent
year to year increases, growing 19.4% from 2003 to 2007. Much of
this growth is attributable to demand in emerging markets, such
as China, where industry vehicle sales increased 20.4% to
8.6 million vehicles in 2007, from 7.1 million
vehicles in 2006.
Our worldwide vehicle sales in the quarter ended June 30,2008 were 2.3 million vehicles, down slightly from the
2.4 million vehicles in the corresponding period in 2007.
Year to date vehicle sales in 2008 totaled 4.5 million
vehicles compared to 4.7 million vehicles in the
corresponding period in 2007. Vehicle sales increased for GME,
GMLAAM and GMAP and declined for GMNA.
Our global market share in the quarter and year to date period
ended June 30, 2008 compared to the corresponding periods
in 2007 are set forth below:
In the near-term, we expect the challenging market conditions
that began to develop in 2007 to continue. The turmoil in the
mortgage and credit markets, continued reductions in housing
values, high fuel prices and the threat of a recession have
continued to negatively impact consumers’ willingness to
purchase our products. These factors have contributed to lower
vehicle sales in North America and, combined with shifts in
consumer preferences toward cars and away from fullsize
pick-up
trucks and sport utility vehicles, have negatively impacted our
results as such larger vehicles are among our more profitable
products. At our Annual Stockholders’ Meeting in June 2008,
we announced several actions in response to changing industry
conditions:
•
In line with our strategy to align production capacity with
demand, we are eliminating production shifts at certain of our
North American fullsize
pick-up
truck and sport utility vehicle facilities. We estimate that
this will reduce our production during 2008 by approximately
130,000 vehicles.
•
We are reacting to the shift in the U.S. market by increasing
production of small and midsize cars. We will add a third shift
in September to the Orion Assembly Center in Michigan, which
builds the Chevy Malibu and Pontiac G6. Also in September, we
plan to add a third shift at Lordstown Car Assembly in Ohio,
which builds the Chevy Cobalt and Pontiac G5.
•
We announced the cessation of production at four truck
facilities. Oshawa Truck Assembly in Canada, which builds the
Chevy Silverado and GMC Sierra, will likely cease production in
2009, while Moraine, Ohio, which builds the Chevy TrailBlazer,
GMC Envoy and Saab 9-7x, will cease production at the end of the
2010 model run, or sooner, if demand dictates. Our Janesville,
Wisconsin facility will cease production of medium-duty trucks
by the end of 2009, and the Tahoe, Suburban and Yukon in 2010,
or sooner, if market demand dictates. Chevrolet Kodiak
medium-duty truck production will also end in Toluca, Mexico, by
the end of 2008.
•
We expect that these actions, along with our earlier decisions
to eliminate shifts at two other U.S. truck facilities (Pontiac
and Flint, Michigan), will result in additional GMNA structural
cost savings of more than $1.0 billion, on an average
running rate basis, by 2010.
•
Finally, we are undertaking a strategic review of the HUMMER
brand to determine its fit within our portfolio. We are
currently considering all options, from a complete revamp of the
product lineup to a partial or complete sale of the brand.
Since the Annual Stockholders’ Meeting, U.S. market and
economic conditions have continued to decline. Of greatest
concern is the price of oil, which, as stated above, has led to
rapid changes in the U.S. industry sales mix, and which has
required us to take further actions to position our company for
sustainable profitability and growth. In July 2008 we announced
a number of initiatives aimed at conserving or generating
approximately $15.0 billion of cash through the end of
2009. These actions, along with access to $4.5 billion of
credit lines, are designed to provide ample liquidity through
2009.
These actions, discussed in detail in “Liquidity”
below, include:
•
Several structural cost actions in North America, including
further reductions in truck capacity and related component,
stamping, and powertrain capacity;
•
Reductions in U.S. and Canada salaried cash expenses;
•
Limiting our capital expenditures;
•
Improving working capital in North America and Europe;
•
Deferring certain payments related to the Settlement Agreement;
and
•
Suspending future dividend payments.
We expect these actions to generate approximately
$10.0 billion of cumulative cash improvements by the end of
2009.
We will continue to identify and develop additional sources of
liquidity, including a broad global assessment of our assets for
potential sale or monetization. We believe that we can raise
significant liquidity from asset sales without impacting our
strategic direction. In addition to asset sales, we will also
continue to access global capital markets on an opportunistic
basis. Based on current financial market conditions, our
preferred initial approach will likely be secured debt financing.
On July 28, 2008 we took further actions to align our
production with the shift in consumer demand and overall softer
market demand based on the weak economy in North America. We
will be eliminating a shift at our Moraine, Ohio and Shreveport,
Louisiana facilities and adjusting production run rates at
certain of our facilities in North America. We estimate that
this will reduce our capacity by approximately 117,000 vehicles.
In the quarter ended June 30, 2008, the residual values of
sport utility vehicles and fullsize
pick-up
trucks being returned from lease declined substantially. This
decline is primarily due to the shift in consumer preferences
away from these vehicles in favor of passenger cars and
crossovers. As discussed more fully in this Management’s
Discussion and Analysis, this decline was
the primary factor contributing to a $1.6 billion increase
in our lease related reserves and a $105 million impairment
loss on our portfolio of equipment on operating leases.
We believe that retail leasing will decline as a component of
the overall percentage of vehicle purchases financed in the
United States and Canada across all vehicle manufacturers,
though the decline may vary by vehicle manufacturer. We are
currently taking steps to reduce the percentage of our retail
business that is financed with lease financing. GMAC, our
largest provider of lease financing, is implementing other
initiatives to reduce the risk in its lease portfolio, such as
exiting incentive based lease financing in Canada and reducing
its lease volume in the United States. We plan to continue to
offer leasing options, although they will more likely be
targeted to certain products and segments. We are developing
incentive programs to encourage consumers to purchase rather
than lease vehicles. Lease financing was used for 18% of our
retail sales in the year to date period ended June 30,2008. As this change is currently developing, it is not possible
to reasonably predict what each vehicle manufacturer will do
with its retail leasing incentives. Accordingly, while we
believe this will adversely affect our revenues, it is not
possible to estimate the magnitude of these changes on our
results of operations.
In addition, in the U.S., our results for the quarter and year
to date period ended June 30, 2008 were negatively impacted
by a work stoppage at one of our suppliers, American Axle. As a
result of the work stoppage, approximately 30 of our facilities
in North America were idled. This work stoppage did not
negatively impact our ability to meet customer demand due to the
high levels of inventory at our dealers. However, GMNA’s
results were negatively impacted by $0.8 billion as a
result of the loss of approximately 100,000 production units in
the first quarter of 2008. In the second quarter, the American
Axle work stoppage resulted in the loss of an additional 230,000
production units and had an earnings before tax impact of
approximately $1.8 billion. The International Union, United
Automobile, Aerospace and Agricultural Workers of American (UAW)
ratified a new labor agreement with American Axle on
May 22, 2008. We anticipate that lost production will not
be fully recovered, due to the current economic environment in
the U.S. and to the market shift away from the types of vehicles
that have been most strongly affected. As consideration for
resolving the work stoppage, we agreed with American Axle to
provide them with upfront financial support capped at
$215 million, of which $197 million is accrued, to
help fund employee buyouts, early retirements and buydowns.
Several other GM facilities were also idled by other work
stoppages associated with finalizing local UAW agreements. These
work stoppages resulted in the loss of approximately 33,000
production units in the second quarter, and had an earnings
before tax impact of approximately $0.2 billion. Members of
the local union at the Lansing Delta Township facility in
Lansing, Michigan ratified a new local labor agreement and
production resumed on May 19, 2008. Members of the local
union at the Fairfax facility in Kansas City, Kansas also
ratified a new local labor agreement and production resumed on
May 22, 2008. We plan to recover the lost production over
the remainder of this year.
Europe
The European market grew slightly during the year to date period
ended June 30, 2008 compared to the corresponding period in
2007. This increase was driven by the continued strong growth in
the emerging markets of Eastern Europe. The Western European
markets in aggregate did not report growth, with particularly
significant declines in Spain and Italy. While the German market
grew from lower levels in the corresponding period in 2007,
pricing conditions remain difficult due to intense competitive
activity. In general, we expect the Western European markets to
face a challenging environment in the near-term, due to
increasing inflationary pressures from high commodity and oil
prices, volatile credit and foreign exchange markets, and lower
consumer confidence. In addition, we expect recent emission
legislation in Western Europe to unfavorably impact our
potential costs in these markets.
2008
Priorities Update
In addition, as disclosed in our 2007
10-K, our
growth and profitability priorities are straightforward:
Continue development and implementation of our advanced
propulsion strategy; and
•
Drive the benefits of managing the business globally.
The following summarizes the progress on these priorities in the
quarter and year to date period ended June 30, 2008, as
well as changes in any key factors affecting our current and
future results and our North American Turnaround Plan.
Continue
to Execute Great Products.
In June 2008 we announced that we were implementing certain
strategic initiatives over the next few years to respond to
growing demand for more fuel efficient vehicles and to address
the economic and market challenges in North America. The
initiatives include a new global compact car program for our
Chevrolet brand, a next generation for the Chevy Aveo and a high
efficiency engine module for the U.S. market. In addition, the
Board of Directors authorized funds for production of the Chevy
Volt extended range electric vehicle. Recognizing the changes in
consumer preferences, 18 of our next 19 new products are
expected to be cars and crossovers.
Build
Strong Brands and Distribution Channels.
As discussed above under “Near-Term Market
Challenges,” we are undertaking a strategic review of the
HUMMER brand to determine its fit within our portfolio. We are
considering all options, including a complete revamp of the
product lineup to a partial or complete sale of the brand.
Execute
Additional Cost Reduction Initiatives.
As discussed above under “Near-Term Market Challenges”
and below under “Liquidity,” we have initiated
significant actions to be implemented over the next two years to
address our cost structure in response to current economic
conditions. The expected cash expenditure of the 2008 Special
Attrition Program is $0.3 billion, of which
$0.1 billion was incurred in the quarter ended
June 30, 2008 and $0.2 billion is expected to be spent
over the remainder of 2008. We expect total cash expenditures
related to the capacity actions to be $0.9 billion, of
which we plan to spend $0.1 billion in 2008,
$0.2 billion in 2009, and $0.6 billion beyond 2009.
Grow
Aggressively in Emerging Markets.
Vehicle sales and revenues continue to grow globally, with the
strongest growth in emerging markets such as China, India and
the ASEAN region, as well as Russia, Brazil, the Middle East and
the Andean region. We believe that growth in these emerging
markets will continue to help mitigate challenging near-term
market conditions in North America and Western Europe. As a
result, even though we are reducing costs in many portions of
our business, we expect to continue to expend previously planned
levels of capital in these emerging markets, particularly China.
Continue
to Develop and Implement our Advanced Propulsion
Strategy.
We 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. For example, we have entered
into arrangements with battery and biofuel companies to support
development of commercially viable applications of these
technologies. We anticipate that this strategy will require a
major commitment of technical and financial resources. Like
others in the automotive industry, we recognize that the key
challenge to our advanced propulsion strategy will be our
ability to price our products to cover cost increases driven by
new technology. Since the beginning of 2008, emissions
legislation was passed or enacted in a number of Western
European countries which we believe will increase our costs in
these markets.
Drive the
Benefits of Managing the Business Globally.
We continue to focus on restructuring our operations and have
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
increasingly competitive environment. As we build functional and
technical excellence, we plan to leverage our products,
powertrains, supplier base and technical expertise globally so
that we can flow our existing resources to support opportunities
for highest returns at the lowest cost.
Income (loss) from continuing operations before income taxes,
equity income and minority interests
(15,358
)
451
(18,015
)
294
(15,809
)
n.m.
(18,309
)
n.m.
Income tax expense (benefit)
308
(320
)
961
(381
)
(628
)
(196.3
)%
(1,342
)
n.m.
Equity income, net of tax
128
170
260
326
(42
)
(24.7
)%
(66
)
(20.2
)%
Minority interests, net of tax
67
(157
)
(6
)
(259
)
224
142.7
%
253
97.7
%
Income (loss) from continuing operations
(15,471
)
784
(18,722
)
742
(16,255
)
n.m.
(19,464
)
n.m.
Income from discontinued operations, net of tax
—
107
—
211
(107
)
(100.0
)%
(211
)
(100.0
)%
Net income (loss)
$
(15,471
)
$
891
$
(18,722
)
$
953
$
(16,362
)
n.m.
$
(19,675
)
n.m.
Automotive cost of sales rate
115.6
%
91.0
%
102.6
%
91.3
%
24.6
%
n.m
11.3
%
n.m
Net margin from net income (loss)
(40.5
)%
1.9
%
(23.2
)%
1.1
%
(42.4
)%
n.m
(24.3
)%
n.m
n.m. = not meaningful
Quarter
and Year to Date Period Ended June 30, 2008 Compared to
Quarter and Year to Date Period Ended June 30,2007
In the quarter ended June 30, 2008, our Total net sales and
revenues decreased $8.5 billion (or 18.3%) due to a decline
in vehicle sales at GMNA, partially offset by increases in
vehicle sales at GME and GMLAAM. Our lower revenues include
$1.6 billion at GMNA related to declining residual values
on fullsize
pick-up
trucks and sport utility vehicles. We reported an operating loss
due to lower revenues and the impact of lower volume at GMNA, a
labor stoppage at American Axle, higher costs associated with
capacity related activities in North America and Europe and an
increase in our liability relating to the Delphi Benefit
Guarantee Agreements. Our loss from continuing operations and
our net loss increased significantly because of the previously
mentioned factors combined with continued and greater losses
from our investment in GMAC, including our share of
a $0.7 billion impairment charge on its portfolio of
equipment under operating leases, a $0.7 billion impairment
on our Common Membership Interests and a $0.6 billion
impairment charge on our Preferred Membership Interests.
In the quarter ended June 30, 2008 we determined that GM
Daewoo Auto & Technology Company (GM Daewoo), our 50.9%
owned and consolidated Korean subsidiary, included in our GMAP
segment, had been applying hedge accounting to certain
derivative contracts designated as cash flow hedges of
forecasted sales without fully considering whether these sales
were at all times probable of occurring. Under
SFAS No. 133, gains and losses on derivatives used to
hedge a probable forecasted transaction are deferred as a
component of Other comprehensive income and reclassified into
earnings in the period the forecasted transaction occurs. Gains
and losses on derivatives related to forecasted transactions
that are not probable of occurring are required to be recorded
in current period earnings. In the quarter ended June 30,2008, we recognized in Automotive sales $442 million of
losses ($285 million in income (loss) from continuing
operations before income taxes) on these derivatives. This
included a correction of our previous accounting by recognizing
$407 million of losses ($262 million in income (loss)
from continuing operations before income taxes and
$150 million after-tax and after minority interests) on
these derivatives which had been inappropriately deferred in
Accumulated other comprehensive income. Approximately
$250 million ($163 million in income (loss) from
continuing operations before income taxes and $93 million
after-tax and after minority interests) should have been
recognized in earnings in the quarter ended March 31, 2008,
and the remainder should have been recognized in prior periods,
predominantly in 2007. We have not restated our condensed
consolidated financial statements or prior annual financial
statements because we have concluded that the effect of
correcting for this item and other minor
out-of-period
adjustments is not material to the current quarter and to each
of the earlier periods. Further information on each of our
businesses and segments is presented later in this MD&A.
In the year to date period ended June 30, 2008, our Total
net sales and revenues decreased $9.3 billion (or 10.3%)
due to a decline in vehicle sales at GMNA, partially offset by
increases in vehicle sales at GME, GMLAAM and GMAP. We reported
an operating loss due to lower revenues and the impact of lower
volume at GMNA, a labor stoppage at American Axle, higher costs
associated with capacity related activities in North America and
Europe and an increase in our liability relating to the Delphi
Benefit Guarantee Agreements. Our loss from continuing
operations and our net loss increased significantly, because of
the previously mentioned factors combined with continued and
greater losses from our investment in GMAC, including our share
of a $0.7 billion impairment charge on its portfolio of
equipment under operating leases, a $2.0 billion impairment
charge on our GMAC Common Membership Interests and a
$0.8 billion impairment charge on our GMAC Preferred
Membership Interests. Further information on each of our
businesses and segments is presented later in this MD&A.
Changes
in Consolidated Financial Condition
Accounts
and Notes Receivable, Net
Accounts and notes receivable, net totaled $8.9 billion and
$9.7 billion at June 30, 2008 and December 31,2007, respectively. The decrease of $0.7 billion (or 7.4%)
results from various factors. GMNA decreased due to a
$0.5 billion change in accounts receivable securitizations
and allowances and lower receivable balance of
$0.4 billion, primarily as a result of a decrease in sales.
GMAP decreased $0.2 billion due to the decrease of
$0.3 billion in dividends receivable partially offset by
increased sales. This decrease was offset as GME increased
$0.6 billion due to increased sales offset by a
$0.2 billion transfer of accounts receivable financing to
GMAC in 2008 and $0.2 billion of Foreign Currency
Translation.
Accounts and notes receivable, net totaled $8.9 billion and
$10.2 billion at June 30, 2008 and June 30, 2007,
respectively. The decrease of $1.3 billion (or 12.6%)
resulted from lower receivable balances at GMNA of
$1.0 billion, primarily as a result of a decrease in sales.
An additional $0.4 billion decrease in GMNA is due to a
change in accounts receivable securitizations and allowances.
GMAP decreased $0.1 billion due to a $0.4 billion
decrease in dividends receivable, partially offset by an
increase in sales. This decrease was offset as GME increased
$0.4 billion due to Foreign Currency Translation and
$0.1 billion due to the addition of a new unit and GMLAAM
increased $0.1 billion due to increased sales.
Inventories totaled $17.7 billion and $14.9 billion at
June 30, 2008 and December 31, 2007, respectively. The
increase of $2.8 billion (or 18.8%) is due to increases in
each region. GME increased $1.5 billion due to a
$1.2 billion increase in inventory build up related to the
normal seasonal production cycle and $0.3 billion in
Foreign Currency Translation. GMNA inventory increased
$0.5 billion due to the American Axle work stoppage and
$0.2 billion due to precious group metal prices. GMLAAM
increased $0.4 billion and GMAP increased
$0.3 billion, primarily related to finished goods.
Inventories totaled $17.7 billion and $15.1 billion at
June 30, 2008 and June 30, 2007, respectively. The
increase of $2.7 billion (or 17.7%) is due to increases in
each region. GME increased $1.2 billion primarily due to
$0.6 billion from Foreign Currency Translation and
$0.4 billion from higher levels of inventory. Production
volume increased $0.6 billion at GMAP and $0.4 billion
at GMNA. GMLAAM increased $0.4 billion, primarily related
to finished goods.
Financing
Equipment on Operating Leases, Net
Financing equipment on operating leases, net totaled
$3.8 billion and $6.7 billion at June 30, 2008
and December 31, 2007, respectively. The decrease of
$2.9 billion (or 43.3%) is due to the planned reduction of
Equipment on operating leases, net which we retained after
selling 51% of our equity interest in GMAC, and the impact of
the $105 million impairment charge discussed below.
Financing equipment on operating leases, net totaled
$3.8 billion and $9.1 billion at June 30, 2008
and June 30, 2007, respectively. The decrease of
$5.3 billion (or 58.4%) is due to the planned reduction of
Equipment on operating leases, net which we retained after
selling 51% of our equity interest in GMAC, and the impact of
the $105 million impairment charge discussed below.
The quarter and year to date period ended June 30, 2008
include a $105 million impairment charge related to our
portfolio of equipment on operating leases. The impairment
charge was the result of our regular review of residual values
related to these leased assets. In the quarter ended
June 30, 2008, residual values of fullsize
pick-up
trucks and sport utility vehicles experienced a sudden and
significant decline as a result of a shift in customer
preference to passenger cars and crossover vehicles and away
from sport utility vehicles, which is the primary reason for the
impairment charge.
Financing
Debt
Financing debt totaled $2.8 billion and $4.9 billion
at June 30, 2008 and December 31, 2007, respectively.
The decrease of $2.2 billion (or 43.9%) is due primarily to
the repayment of debt secured by Equipment on operating leases,
net which we retained after selling 51% of our equity interest
in GMAC.
Financing debt totaled $2.8 billion and $7.1 billion
at June 30, 2008 and June 30, 2007, respectively. This
decrease of $4.4 billion (or 61.4%) is due primarily to the
repayment of debt secured by Equipment on operating leases, net
which we retained after selling 51% of our equity interest in
GMAC.
Equity in
Net Assets of GMAC LLC
Equity in net assets of GMAC LLC totaled $3.5 billion and
$7.1 billion at June 30, 2008 and December 31,2007, respectively. The decrease of $3.6 billion (or 51.2%)
is attributable to a $2.0 billion impairment of the
investment in the year to date period ended June 30, 2008
as well as the decline attributable to our share of GMAC’s
net loss, recognized under the equity method, in the year to
date period ended June 30, 2008 totaling $1.6 billion.
Equity in net assets of GMAC LLC totaled $3.5 billion and
$7.6 billion at June 30, 2008 and June 30, 2007,
respectively. The decrease of $4.1 billion (or 54.3%) is
attributable to $2.6 billion of losses recognized under the
equity method and the $2.0 billion impairment discussed
above, offset by the $0.5 billion increase in our
investment related to the 2007 conversion of Preferred
Membership Interests to Common Membership Interests.
Other current assets and deferred income taxes totaled
$3.6 billion and $12.5 billion at June 30, 2008
and June 30, 2007, respectively. The decrease of
$8.9 billion (or 71.3%) relates primarily to valuation
allowances against our short-term deferred income tax assets
established in the quarter ended September 30, 2007. These
valuation allowances are discussed below.
Deferred
Income Tax Asset
Deferred income tax assets totaled $1.0 billion and
$2.1 billion at June 30, 2008 and December 31,2007, respectively. The decrease of $1.1 billion (or 52.1%)
resulted primarily from the establishment of valuation
allowances relating to long-term deferred tax assets in Spain
and the United Kingdom.
Deferred income tax assets totaled $1.0 billion and
$32.4 billion at June 30, 2008 and June 30, 2007,
respectively. The decrease of $31.4 billion (or 96.9%)
relates primarily to establishing full valuation allowances in
the quarter ended September 31, 2007 against our long-term
deferred tax assets in the United States, Canada and Germany and
in the quarter ended March 31, 2008 in Spain and the United
Kingdom. Refer to Corporate and Other Operations discussion
below for further information on the factors resulting in the
decision to record the valuation allowance.
Short-term
Borrowings and Current Portion of Long-term Debt
The Short-term borrowings and current portion of long-term debt
balance totaled $8.0 billion and $6.0 billion at
June 30, 2008 and December 31, 2007, respectively. The
increase of $2.0 billion (or 32.4%) is primarily due to the
reclassification of $1.5 billion of convertible debt from
non-current to current and $0.9 billion of new borrowings
at several of our subsidiaries in the quarter ended
June 30, 2008. These increases were partially offset by
payments at maturity totaling $0.5 billion.
The Short-term borrowings and current portion of long-term debt
balance totaled $8.0 billion and $5.2 billion at
June 30, 2008 and June 30, 2007, respectively. The
increase of $2.9 billion (or 55.5%) is due to the
reclassification of $1.5 billion of convertible debt and
$0.8 billion of unsecured debt from non-current to current
and $0.9 billion of new borrowings at several of our
subsidiaries in the quarter ended June 30, 2008. These
increases were partially offset by payments at maturity totaling
$0.5 billion.
Long-term
Debt
Long-term debt totaled $32.5 billion and $33.4 billion
at June 30, 2008 and December 31, 2007, respectively.
The decrease of $0.9 billion (or 2.8%) resulted from the
reclassification of $1.5 billion of convertible debt from
non-current to current partially offset by $0.3 billion of
new borrowings at GMLAAM and $0.3 billion of effects of
Foreign Currency Translation related to Euro-denominated debt.
Long-term debt totaled $32.5 billion and $34.1 billion
at June 30, 2008 and June 30, 2007, respectively. The
decrease of $1.7 billion (or 4.9%) resulted from the
reclassification of $1.5 billion of convertible debt and
$0.8 billion of unsecured bonds from non-current to
current, partially offset by $0.6 billion of effects of
Foreign Currency Translation related to Euro-denominated debt.
Accrued
Expenses
Accrued expenses totaled $37.4 billion and
$34.8 billion at June 30, 2008 and December 31,2007, respectively. The increase of $2.6 billion (or 7.3%)
is primarily due to increases in lease residual accruals
totaling $1.6 billion, increases in other accruals
(primarily related to 2008 Special Attrition Program and
American Axle) totaling $1.1 billion, increases in
derivatives contracts totaling $0.9 billion and value added
taxes (VAT) taxes in GME totaling $0.4 billion. These
increases were offset by a decrease in customer deposits
totaling $1.0 billion and a $0.3 billion decrease in
dealer sales incentives.
Accrued expenses totaled $37.4 billion and
$34.6 billion at June 30, 2008 and June 30, 2007,
respectively. The increase of $2.8 billion (or 7.9%) was
primarily the result of increases in other accruals totaling
$3.1 billion of which the most significant were a
$0.9 billion increase in the Delphi accrual, a
$0.5 billion increase in rental car sales allowances, a
$0.4 billion increase in deferred revenue and increases in
lease residual accruals totaling $1.6 billion. These
increases are offset by a $1.8 billion decrease in customer
deposits and $1.3 billion in lower sales incentives.
Income (loss) from continuing operations before income taxes,
equity income and minority interests
(9,253
)
790
(9,257
)
923
(10,043
)
n.m.
(10,180
)
n.m.
Equity income, net of tax
128
170
260
324
(42
)
(24.7
)%
(64
)
(19.8
)%
Minority interests, net of tax
67
(157
)
7
(258
)
224
142.7
%
265
102.7
%
Income (loss) from continuing operations before income taxes
$
(9,058
)
$
803
$
(8,990
)
$
989
$
(9,861
)
n.m.
$
(9,979
)
n.m.
Income from discontinued operations, net of tax
$
—
$
107
$
—
$
211
$
(107
)
(100.0
)%
$
(211
)
(100.0
)%
Automotive cost of sales rate
115.2
%
91.0
%
102.5
%
91.2
%
24.2
%
n.m.
11.3
%
n.m.
Net margin from continuing operations before income taxes,
equity income and minority interests
(24.6
)%
1.7
%
(11.6
)%
1.0
%
(26.3
)%
n.m.
(12.6
)%
n.m.
(Volume in thousands)
Production Volume (a)
2,224
2,410
4,457
4,750
(186
)
(7.7
)%
(293
)
(6.2
)%
Vehicle Sales (b):
Industry
18,522
18,229
36,648
35,692
292
1.6
%
956
2.7
%
GM
2,287
2,407
4,540
4,675
(120
)
(5.0
)%
(135
)
(2.9
)%
GM market share — Worldwide
12.3
%
13.2
%
12.4
%
13.1
%
(0.9
)%
n.m.
(0.7
)%
n.m.
n.m. = not meaningful
(a)
Production volume represents the number of vehicles manufactured
by our assembly facilities and also includes vehicles produced
by certain joint ventures.
(b)
Vehicle sales primarily represent sales to the ultimate customer.
This discussion highlights key changes in operating results
within GMA. The drivers of these changes are discussed in the
regional analyses that follow this section.
Quarter
and Year to Date Period Ended June 30, 2008 Compared to
Quarter and Year to Date Period Ended June 30,2007
Industry
Global Vehicle Sales
Industry vehicle sales grew strongly in all regions outside
North America.
In the quarter ended June 30, 2008, industry vehicle sales
increased 292,000 vehicles (or 1.6%) to 18.5 million
vehicles. Asia Pacific region by 433,000 vehicles (or 8.5%) to
5.5 million vehicles; Latin America/Africa/Mid-East (LAAM)
region increased 232,000 vehicles (or 13.3%) to 2.0 million
vehicles; and Europe increased 145,000 vehicles (or 2.4%) to
6.3 million vehicles. These increases were offset as
industry sales decreased in North America by 518,000 vehicles
(or 9.8%) to 4.8 million vehicles.
In the year to date period ended June 30, 2008, industry
vehicle sales increased 956,000 vehicles (or 2.7%) to
36.6 million vehicles. Asia Pacific region by 997,000
vehicles (or 9.5%) to 11.5 million vehicles; LAAM region
increased 432,000 vehicles (or 12.7%) to 3.8 million
vehicles; and Europe increased 379,000 vehicles (or 3.2%) to
12.2 million vehicles. These increases were offset as
industry sales decreased in North America by 852,000 vehicles
(or 8.5%) to 9.1 million vehicles.
GM Global
Vehicle Sales
In the quarter ended June 30, 2008 our global vehicle sales
decreased 120,000 (or 5.0%) as sales decreased at GMNA by
236,000 vehicles, offset by increases of 52,000 vehicles at
GMLAAM, 49,000 vehicles at GMAP and 15,000 vehicles at GME.
In the quarter ended June 30, 2008, our global production
volume decreased by 186,000 vehicles (or 7.7%). Production
volume decreased at GMNA by 308,000 vehicles, offset by
increases at GMAP of 48,000 vehicles, GMLAAM of 43,000 vehicles,
GME of 31,000 vehicles.
In the year to date period ended June 30, 2008 our global
vehicle sales decreased 135,000 vehicles (or 2.9%) as sales
decreased at GMNA by 344,000 vehicles, offset by increases of
106,000 vehicles at GMLAAM, 72,000 vehicles at GMAP and 32,000
vehicles at GME.
In the year to date period ended June 30, 2008, our global
production volume decreased by 293,000 vehicles. Production
volume decreased at GMNA by 486,000 vehicles, offset by
increases at GMAP of 116,000 vehicles, GMLAAM of 64,000 vehicles
and GME of 13,000 vehicles.
Total Net
Sales and Revenue
The decrease in Total net sales and revenue in the quarter ended
June 30, 2008 of $8.1 billion (or 17.7%) was driven by
a decline in Total net sales and revenue of $9.8 billion at
GMNA and $0.1 billion at GMAP. The GMNA decrease includes
$1.6 billion related to declining residual values on
fullsize pick-up trucks and sport utility vehicles. The decrease
was offset by increases of $1.1 billion at GME and
$0.8 billion at GMLAAM.
The decrease in Total net sales and revenue in the year to date
period ended June 30, 2008, of $8.5 billion (or 9.6%)
was driven by a decline in Total net sales and revenue of
$13.4 billion at GMNA as well as $0.3 billion in
incremental inter-segment eliminations. The decrease was offset
by increases of $2.5 billion at GME, $2.0 billion at
GMLAAM and $0.8 billion at GMAP.
Automotive
Cost of Sales
The increase in Automotive cost of sales in the quarter ended
June 30, 2008 of $1.7 billion (or 4.2%) resulted from
increases of $1.2 billion at GME, $0.7 billion at
GMLAAM and $0.4 billion at GMAP, offset by a decline in
Automotive cost of sales of $0.6 billion at GMNA.
The increase in Automotive cost of sales in the year to date
period ended June 30, 2008 of $1.4 billion (or 1.7%)
resulted from increases of $2.4 billion at GME,
$1.6 billion at GMLAAM and $1.1 billion at GMAP,
offset by a decline in Automotive cost of sales of
$3.4 billion at GMNA as well as $0.3 billion in
incremental inter-segment eliminations.
Selling,
General and Administrative Expense
The increase in Selling, general and administrative expense in
the quarter ended June 30, 2008 of $0.1 billion (or
4.6%) was driven by increases of $0.1 billion at GME and
$0.1 billion at GMAP offset by a decrease of
$0.1 billion at GMLAAM.
The increase in Selling, general and administrative expense in
the year to date period ended June 30, 2008 of
$0.4 billion (or 7.0%) was driven by increases of
$0.2 billion at GME and $0.1 billion at GMAP.
Automotive
Interest and Other Income (Expense), Net
The decrease in Automotive interest and other income (expense),
net in the quarter ended June 30, 2008 of $51 million
(or 26.4%) resulted primarily from a decrease in GME’s VAT
refund and lower interest income.
The improvement in Automotive interest and other income
(expense), net in the year to date period ended June 30,2008 of $75 million (or 12.7%) resulted primarily from a
decrease in GME’s VAT refund.
Equity
Income, Net of Tax
Equity income, net of tax, in the quarter ended June 30,2008 decreased $42 million (or 24.7%) primarily as a result
of $33 million in decreased equity earnings from
investments at GMNA and $18 million in decreased equity
earnings from investments at GMAP.
Equity income, net of tax, in the year to date period ended
June 30, 2008 decreased $64 million (or 19.8%)
primarily as a result of $66 million in decreased equity
earnings from investments at GMNA and $11 million in
decreased equity earnings from investments at GMAP offset by
$14 million in gains from investments at GME.
Minority
Interests, Net of Tax
The decrease in Minority interests, net of tax in the quarter
ended June 30, 2008 of $0.2 billion (or 142.7%)
resulted from decreased earnings of consolidated affiliates,
most notably at GMAP.
The decrease in Minority interests, net of tax in the year to
date period ended June 30, 2008 of $0.3 billion (or
102.7%) resulted from decreased earnings of consolidated
affiliates, most notably at GMAP.
Income
from Discontinued Operations, Net of Tax
In August 2007, we completed the sale of the commercial and
military operations of Allison. Income from discontinued
operations, net of tax, was $107 million and
$211 million in the quarter and year to date period ended
June 30, 2007, respectively.
Supplemental
Categories for Expenses
We evaluate GMA and make certain decisions using supplemental
categories for variable expenses and non-variable expenses. We
believe these categories provide us with useful information and
that investors would also find it beneficial to view the
business in a similar manner.
We believe contribution costs, structural costs and impairment,
restructuring and other charges provide meaningful supplemental
information regarding our expenses because they place GMA
expenses into categories that allow us to assess
the cost performance of GMA. We use these categories to evaluate
our expenses, and believe that these categories allow us to
readily view operating trends, perform analytical comparisons,
benchmark expenses among geographic segments and assess whether
the North American Turnaround Plan and globalization strategy
for reducing costs are on target. We use these categories for
forecasting purposes, evaluating management and determining our
future capital investment allocations. Accordingly, we believe
these categories are useful to investors in allowing for greater
transparency of the supplemental information that we use in our
financial and operational decision-making. These categories of
expenses do not include the results of hedging activities with
respect to interest rates, certain commodity prices and foreign
currency exchange rates and the effect of foreign currency
transactions and translation of financial assets and
liabilities, which are included in Automotive cost of sales but
are analyzed separately.
While we believe that contribution costs, structural costs and
impairment, restructuring and other charges provide useful
information, there are limitations associated with the use of
these categories. Contribution costs, structural costs,
impairment, restructuring and other charges may not be
completely comparable to similarly titled measures of other
companies due to potential differences between companies in the
exact method of calculation. 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. We
compensate for these limitations by using these categories as
supplements to Automotive cost of sales and Selling, general and
administrative expense.
The total of contribution costs, structural costs, impairment,
restructuring and other charges equals the total of Automotive
cost of sales and Selling, general and administrative expense
for GMA as shown below.
Derivative and certain foreign currency related items (d)
(0.2
)
0.1
(1.2
)
—
(0.3
)
n.m.
(1.2
)
n.m.
Total
$
46.7
$
44.8
$
88.3
$
86.6
$
1.9
4.2
%
$
1.7
2.0
%
Automotive cost of sales
$
43.4
$
41.7
$
81.6
$
80.3
$
1.7
4.1
%
$
1.3
1.6
%
Selling, general and administrative expense
3.3
3.1
6.7
6.3
0.2
6.5
%
0.4
6.3
%
Total
$
46.7
$
44.8
$
88.3
$
86.6
$
1.9
4.2
%
$
1.7
2.0
%
(a)
Contribution costs are expenses that we consider to be variable
with production. The amount of contribution costs included in
Automotive cost of sales was $28.6 billion and
$31.6 billion in the quarters ended June 30, 2008 and
2007, respectively, and those costs were comprised of material
cost, freight and policy and warranty expenses. The amount of
contribution costs classified in Selling, general and
administrative expenses was $0.3 billion in each of the
quarters ended June 30, 2008 and 2007 and these costs were
incurred primarily in connection with our dealer advertising
programs. The amount of contribution costs included in
Automotive cost of sales was $57.6 billion and
$60.5 billion in the year to date periods ended
June 30, 2008 and 2007, respectively. The amount of
contribution costs classified in Selling, general and
administrative expenses was $0.5 billion in each of the
year to date periods ended June 30, 2008 and 2007.
(b)
Structural costs are expenses that do not generally vary with
production and are recorded in both Automotive cost of sales and
Selling, general and administrative expense. Such costs include
manufacturing labor, pension and other postemployment benefits
(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 $9.9 billion and
$9.8 billion in the quarters ended June 30, 2008 and
2007, respectively, and the amount of structural costs included
in Selling, general and administrative
expense was $3.0 billion and $2.8 billion in the
quarters ended June 30, 2008 and 2007, respectively. The
amount of structural costs included in Automotive cost of sales
was $19.8 billion and $19.5 billion in the year to
date periods ended June 30, 2008 and 2007, respectively,
and the amount of structural costs included in Selling, general
and administrative expense was $6.2 billion and
$5.8 billion in the year to date periods ended
June 30, 2008 and 2007, respectively.
(c)
Impairment, restructuring and other charges are included in
Automotive cost of sales.
(d)
Derivative and certain foreign currency related items are
included in Automotive cost of sales.
Contribution
Costs
The decrease in contribution costs in the quarter ended
June 30, 2008 was driven by lower global wholesale
deliveries to dealers and the shift of sales mix in GMNA to cars
from medium and fullsize
pick-up
trucks and sport utility vehicles. Decreased contribution costs
at GMNA were partially offset by higher costs related to volume
increases in the other regions for a net reduction of
$4.6 billion. Foreign Currency Translation, due primarily
to the weaker U.S. Dollar, increased costs by $1.5 billion.
Other factors, net of favorable material performance, increased
contribution costs $0.1 billion.
In the year to date period ended June 30, 2008,
contribution costs decreased by $6.9 billion due to lower
global volumes. Foreign Currency Translation increased
contribution costs $3.0 billion. Other factors, net of
favorable material performance, increased contribution costs by
$1.0 billion.
Structural
Costs
In the quarter ended June 30, 2008, structural costs
decreased $0.6 billion from lower pension, OPEB and other
manufacturing costs at GMNA. Global engineering and product
development costs increased by $0.2 billion, and Foreign
Currency Translation increased costs by $0.5 billion.
Increased structural costs of $0.2 billion resulted from
higher marketing and manufacturing costs in emerging markets
driven by volume growth, with these costs partially offset by
lower salaried incentive compensation at GMNA.
In the year to date period ended June 30, 2008, cost
reductions of $1.1 billion from lower pension, OPEB and
other manufacturing costs at GMNA were more than offset by
increases of $1.8 billion in Foreign Currency Translation
and other factors.
Restructuring
and Other Charges
We incurred certain expenses related primarily to restructuring
initiatives, which are included in Automotive cost of sales.
Additional details regarding these expenses are included in
Notes 12, 13 and 14 to our condensed consolidated financial
statements. These expenses are comprised of:
$1.3 billion of total charges for restructuring initiatives
as follows: GMNA, $1.1 billion; GME, $0.1 billion;
GMAP, $0.1 billion;
•
$0.3 billion of charges at GMNA related to our agreement
with the CAW and $0.2 billion of charges at GMNA related to
support we provided to American Axle.
The amounts in the quarter ended June 30, 2007 are related
to the following:
•
$91 million net charge for restructuring initiatives at
GMNA, including special attrition programs and $30 million
and $9 million of charges for restructuring initiatives at
GME and GMAP, respectively;
•
$95 million and $14 million of charges for asset
specific impairment at GMNA and GMAP, respectively; and
•
Adjustment of $6 million at GMNA in conjunction with
cessation of production at a previously divested business.
The amounts in the year to date period ended June 30, 2008
are related to the following:
•
$3.5 billion of total charges for restructuring initiatives
in GMNA related to special attrition programs, including related
curtailment charges;
•
$1.4 billion of total charges for restructuring initiatives
as follows: GMNA, $1.1 billion; GME, $0.2 billion;
GMAP, $0.1 billion;
•
$0.5 billion of other charges at GMNA noted above.
The amounts in the year to date period ended June 30, 2007
are related to the following:
•
$24 million of adjustments for restructuring initiatives in
GMNA related to special attrition programs;
•
$0.2 billion of total charges for restructuring initiatives
as follows: GMNA, $95 million; GME, $87 million; GMAP,
$49 million;
•
$95 million and $14 million of charges for asset
specific impairment at GMNA and GMAP, respectively; and
•
Adjustment of $47 million in conjunction with cessation of
production at a previously divested business.
Derivative
and Foreign Currency Related Items
Results of hedging activities with respect to interest rates,
certain commodity prices and foreign currency exchange rates and
the effect of foreign currency transactions and translation are
included in Automotive cost of sales, but are excluded from
structural and contribution costs. Such costs decreased
$0.3 billion and $1.2 billion in the quarter and year
to date period ended June 30, 2008 compared to the
corresponding period in 2007, respectively.
Loss from continuing operations before income taxes, equity
income and minority interests
(9,334
)
(98
)
(10,129
)
(309
)
(9,236
)
n.m.
(9,820
)
n.m.
Equity income (loss), net of tax
(6
)
27
(26
)
40
(33
)
(122.2
)%
(66
)
(165.0
)%
Minority interests, net of tax
(6
)
(17
)
(3
)
(27
)
11
64.7
%
24
88.9
%
Loss from continuing operations before income taxes
$
(9,346
)
$
(88
)
$
(10,158
)
$
(296
)
$
(9,258
)
n.m.
$
(9,862
)
n.m.
Income from discontinued operations, net of tax
$
—
$
107
$
—
$
211
$
(107
)
(100.0
)%
$
(211
)
(100.0
)%
Automotive cost of sales rate
136.4
%
93.0
%
112.9
%
92.6
%
43.4
%
n.m.
20.3
%
n.m.
Net margin from continuing operations before income taxes,
equity income and minority interests
(47.1
)%
(0.3
)%
(22.8
)%
(0.5
)%
(46.8
)%
n.m.
(22.3
)%
n.m.
(Volume in thousands)
Production Volume (a):
Cars
382
402
742
801
(20
)
(5.0
)%
(59
)
(7.4
)%
Trucks
452
740
977
1,404
(288
)
(38.9
)%
(427
)
(30.4
)%
Total
834
1,142
1,719
2,205
(308
)
(27.0
)%
(486
)
(22.0
)%
Vehicle Sales (b):
Industry — North America
4,779
5,296
9,140
9,992
(518
)
(9.8
)%
(852
)
(8.5
)%
GMNA
964
1,200
1,911
2,256
(236
)
(19.7
)%
(344
)
(15.3
)%
GM market share — North America
20.2
%
22.7
%
20.9
%
22.6
%
(2.5
)%
n.m.
(1.7
)%
n.m.
Industry — U.S.
3,909
4,441
7,550
8,428
(532
)
(12.0
)%
(878
)
(10.4
)%
GM market share — U.S. industry
20.4
%
22.8
%
21.3
%
22.8
%
(2.4
)%
n.m.
(1.5
)%
n.m.
GM cars market share — U.S. industry
17.1
%
19.4
%
18.0
%
19.4
%
(2.3
)%
n.m.
(1.4
)%
n.m.
GM trucks market share — U.S. industry
24.3
%
26.0
%
24.6
%
25.7
%
(1.7
)%
n.m.
(1.1
)%
n.m.
n.m. = not meaningful
(a)
Production volume represents the number of vehicles manufactured
by our assembly facilities and also includes vehicles produced
by certain joint ventures.
(b)
Vehicle sales primarily represent sales to the ultimate customer.
Quarter
and Year to Date Period Ended June 30, 2008 Compared to
Quarter and Year to Date Period Ended June 30,2007
Industry
Vehicle Sales
Industry vehicle sales in North America decreased for the
quarter and year to date period ended June 30, 2008 by
518,000 vehicles (or 9.8%) and 852,000 vehicles (or 8.5%),
respectively, principally due to weakness in the economy
resulting from a decline in the housing market and rising gas
prices. We expect that the weakness in the U.S. economy will
continue to result in challenging near-term market conditions in
GMNA. Refer to “Near-Term Market Challenges” in this
MD&A for further discussion.
Total Net
Sales and Revenue
Total net sales and revenue decreased in the quarter ended
June 30, 2008 by $9.8 billion (or 33.2%) due to a
decline in volumes and unfavorable mix of $8.4 billion. In
addition, GMNA had unfavorable pricing of $1.7 billion
primarily due to a $1.6 billion increase in the accrual for
residual support programs for leased vehicles due to the decline
in residual values of fullsize
pick-up
trucks and sport utility vehicles and weakness in the fullsize
pick-up
truck market. These factors were partially offset by favorable
Foreign Currency Translation of $0.3 billion.
Total net sales and revenue decreased in the year to date period
ended June 30, 2008 by $13.4 billion (or 23.1%) due to
a decline in volumes and unfavorable mix of $11.9 billion.
In addition, GMNA had unfavorable pricing of $2.1 billion
primarily due to a $1.6 billion increase in the accrual for
residual support programs for leased vehicles in the quarter
ended June 30, 2008 due to the decline in residual values
of fullsize
pick-up
trucks and sport utility vehicles and weakness in the fullsize
pick-up
truck market. These factors were partially offset by favorable
Foreign Currency Translation of $0.6 billion.
The decrease in volume for the quarter and year to date period
ended June 30, 2008 of 308,000 vehicles (or 27.0%) and
486,000 vehicles (or 22.0%), respectively, was driven by a
reduction in U.S. industry sales volumes, lower production as a
result of a work stoppage at our supplier American Axle and the
impact of our declining market share in the United States.
The decline in U.S. industry market share for the quarter and
year to date period ended June 30, 2008 of 2.4 and
1.5 percentage points, respectively, reflects macroeconomic
factors including higher fuel prices and a shift in customer
demand from trucks and sport utility vehicles to passenger cars
and crossovers. This shift in customer preference was the
leading contributor to the market share losses for GMNA in the
U.S. market. Despite these economic and competitive pressures,
new models in our portfolio of passenger cars and crossover
vehicles performed well during the period.
In Canada, in the quarter ended June 30, 2008, industry
sales decreased 4,000 vehicles (or 0.8%), which coupled with
restricted availability of the fullsize
pick-up
trucks due to the American Axle work stoppage, led to a decrease
in our Canada industry market share of 4.6 percentage points. In
the year to date period ended June 30, 2008, while industry
sales were up slightly in Canada by 20,000 vehicles (or 2.2%),
these factors led to a decrease in our Canada industry market
share of 3.2 percentage points.
Total industry sales in Mexico were up 12,000 vehicles (or 4.9%)
in the quarter ended June 30, 2008, with our Mexico
industry market share increasing by 0.4 percentage points,
due mainly to growth in the economy and compact car segment. In
the year to date period ended June 30, 2008, industry sales
in Mexico were down slightly by 3,000 vehicles (or 0.6%), and
our Mexico industry market share also decreased slightly by
0.1 percentage point.
Automotive
Cost of Sales
Automotive cost of sales decreased in the quarter ended
June 30, 2008 by $0.6 billion (or 2.0%) due to:
(1) decreased costs related to lower production volumes and
the mix of vehicles with lower sales volume of
$4.9 billion; (2) manufacturing, retiree pension and
OPEB savings of $0.6 billion from lower manufacturing costs
and hourly headcount levels resulting from attrition and
productivity improvements; and (3) favorable material and
freight performance of $0.1 billion. These decreases were
partially offset by a $4.7 billion increase in charges for
restructuring and other costs associated with GMNA’s
special attrition programs, certain Canadian facility idlings
and finalization of our negotiations with the CAW. Refer to
“Key Factors Affecting Future and Current Results” in
this MD&A for a discussion on the specific factors related
to the 2008 Special Attrition Programs and facility idlings. In
addition, GMNA had increases in Delphi-related charges of
$0.4 billion which offset the decreases mentioned above.
Automotive cost of sales decreased in the year to date period
ended June 30, 2008 by $3.4 billion (or 6.3%)
primarily due to; (1) decreased costs related to lower
production volumes and the mix of vehicles with lower sales
volume of $7.2 billion; (2) manufacturing, retiree
pension and OPEB savings of $1.1 billion from lower
manufacturing costs and hourly headcount levels resulting from
attrition and productivity improvements; (3) gains from
commodity derivative contracts used to hedge forecasted
purchases of raw materials of $0.7 billion; and
(4) favorable material and freight performance of
$0.2 billion. These decreases were partially offset by a
$5.0 billion increase in charges for restructuring and
other costs associated with GMNA’s special attrition
programs, certain Canadian facility idlings and finalization of
our negotiations with the CAW (mentioned above), increased
Delphi-related charges of $0.4 billion, increased warranty
costs of $0.2 billion, and unfavorable Foreign Currency
Translation effects of $0.2 billion in 2008 due to
appreciation of the Canadian Dollar against the U.S. Dollar in
2007.
Automotive cost of sales rate increased in the quarter and year
to date period ended June 30, 2008 to 136.4% from 93.0% and
to 112.9% from 92.6%, respectively, as the reduction in
structural cost included in Automotive cost of sales did not
fully offset the impact of the volume decline on revenue.
Selling,
General and Administrative Expense
Selling, general and administrative expense in the quarter and
year to date period ended June 30, 2008 decreased
$1 million (or 0.1%) and increased $39 million (or
1.0%), respectively, as less favorable adjustments in the
product liability reserve in the quarter ended June 30,2008 compared to the corresponding period in 2007 were offset by
reductions in incentive compensation costs.
Automotive
Interest and Other Income (Expense), Net
Automotive interest and other income (expense), net decreased
$53 million (or 14.8%) and $212 million (or 27.2%),
respectively, in the quarter and year to date period ended
June 30, 2008 primarily due to reductions in debt balances
with other segments utilizing certain proceeds from the Allison
sale.
Equity
Income (Loss), Net of Tax
Equity income (loss), net of tax decreased $33 million (or
122.2%) and $66 million (or 165.0%), respectively, in the
quarter and year to date period ended June 30, 2008 due to
decreased income from GMNA’s investments in CAMI
Automotive, Inc. (CAMI) as a result of lower production volume,
combined with losses on asset disposals, and NUMMI as a result
of lower volume and launch related expenses associated with the
January 2008 introduction of the new Pontiac Vibe.
Income
from Discontinued Operations, Net of Tax
Income from discontinued operations, net of tax relates to the
commercial and military operations of Allison. Income from this
business of $107 million and $211 million has been
reported as discontinued operations in the quarter and year to
date period ended June 30, 2007, respectively.
Automotive interest and other income (expense), net
(37
)
50
(80
)
51
(87
)
(174.0
)%
(131
)
n.m.
Income from continuing operations before income taxes, equity
income and minority interests
12
312
81
314
(300
)
(96.2
)%
(233
)
(74.2
)%
Equity income, net of tax
21
12
34
20
9
75.0
%
14
70.0
%
Minority interests, net of tax
(13
)
(9
)
(20
)
(15
)
(4
)
(44.4
)%
(5
)
(33.3
)%
Income from continuing operations before income taxes
$
20
$
315
$
95
$
319
$
(295
)
(93.7
)%
$
(224
)
(70.2
)%
Automotive cost of sales rate
92.0
%
90.2
%
91.6
%
91.1
%
1.8
%
n.m.
0.5
%
n.m.
Net margin from continuing operations before income taxes,
equity income and minority interests
0.1
%
3.3
%
0.4
%
1.7
%
(3.2
)%
n.m.
(1.3
)%
n.m.
(Volume in thousands)
Production Volume (a)
495
464
988
975
31
6.7
%
13
1.3
%
Vehicle Sales (b):
Industry — Europe
6,267
6,122
12,227
11,848
145
2.4
%
379
3.2
%
GM Europe
590
575
1,161
1,129
15
2.5
%
32
2.8
%
GM market share — Europe
9.4
%
9.4
%
9.5
%
9.5
%
—
%
n.m.
—
%
n.m.
GM market share — Germany
9.2
%
9.2
%
9.3
%
9.6
%
—
%
n.m.
(0.3
)%
n.m.
GM market share — United Kingdom
16.0
%
15.9
%
15.3
%
15.4
%
0.1
%
n.m.
(0.1
)%
n.m.
GM market share — Russia
10.7
%
9.7
%
11.3
%
9.5
%
1.0
%
n.m.
1.8
%
n.m.
n.m. = not meaningful
(a)
Production volume represents the number of vehicles manufactured
by our assembly facilities and also includes vehicles produced
by certain joint ventures.
(b)
Vehicle sales primarily represent sales to the ultimate
customer, including unit sales of Chevrolet brand products in
the region. The financial results from sales of Chevrolet brand
products are reported as part of GMAP, because those vehicles
are sold by GM Daewoo.
Quarter
and Year to Date Period Ended June 30, 2008 Compared to
Quarter and Year to Date Period Ended June 30,2007
Industry
Vehicle Sales
The growth in industry vehicle sales in the quarter ended
June 30, 2008 of 145,000 vehicles (or 2.4%) primarily
resulted from a 232,000 vehicle (or 33.7%) increase in Russia
and increases of 52,000 vehicles (or 7.5%) in France, 45,000
vehicles (or 4.8%) in Germany and 39,000 vehicles (or 28.1%) in
Ukraine. These increases were partially offset by decreases of
112,000 vehicles (or 21.2%) in Spain and 107,000 vehicles (or
14.0%) in Italy.
The growth in industry vehicle sales in the year to date period
ended June 30, 2008 of 379,000 vehicles (or 3.2%) primarily
resulted from similar trends in the same markets with a 417,000
vehicle (or 35.1%) increase in Russia and increases of 110,000
vehicles (or 46.2%) in Ukraine, 65,000 vehicles (or 4.8%) in
France and 65,000 vehicles (or 3.7%) in Germany partially offset
by decreases of 193,000 vehicles (or 18.9%) in Spain and 177,000
vehicles (or 11.3%) in Italy.
Total Net
Sales and Revenue
Total net sales and revenue increased in the quarter ended
June 30, 2008 by $1.1 billion (or 11.2%) due to:
(1) a favorable effect of $1.1 billion in Foreign
Currency Translation, driven mainly by the strengthening of the
Euro and Swedish Krona versus the U.S. Dollar;
(2) $0.2 billion due to higher volume; offset by
(3) an unfavorable product mix of $0.3 billion caused
primarily by increasing relative volume of lower priced vehicles
such as the Agila and the Corsa and decreasing volume of higher
priced vehicles, most notably the Antara.
Total net sales and revenue increased in the year to date period
ended June 30, 2008 by $2.5 billion (or 13.9%) due to:
(1) a favorable effect of $2.0 billion in Foreign
Currency Translation, driven mainly by the strengthening of the
Euro and Swedish Krona versus the U.S. Dollar;
(2) $0.3 billion due to higher volume; offset by
(3) an unfavorable product mix of $0.4 billion due to
the same factors experienced in the quarter ended June 30,2008 mentioned above.
In the quarter ended June 30, 2008, GME’s wholesale
sales, which exclude sales of Chevrolet brand products,
increased by 12,000 vehicles (or 2.5%). Wholesale volumes
increased most significantly in both Russia and Germany, where
wholesale volumes were each up 10,000 vehicles (or 53.7% and
13.9%, respectively), while wholesale volumes declined by 15,000
vehicles (or 36.8%) in Spain, and by 9,000 vehicles (or 16.2%)
in Italy. The remainder of the change resulted from smaller
increases in countries such as France and Portugal, sales to
North America, and European sales of vehicles imported from the
U.S.
GME’s wholesale sales, which exclude sales of Chevrolet
brand products, increased 24,000 vehicles (or 2.6%) in the year
to date period ended June 30, 2008. Wholesale volumes
increased most significantly in Russia, by 25,000 vehicles (or
87.6%), and by 11,000 vehicles (or 7.4%) in Germany, while
wholesale volumes declined by 24,000 vehicles (or 31.6%) in
Spain, and by 19,000 vehicles (or 17.2%) in Italy. As mentioned
above, the remainder of the change resulted from smaller
increases in countries such as France and Portugal and other
central European countries, sales to North America, and European
sales of vehicles imported from the U.S.
Automotive
Cost of Sales
Automotive cost of sales increased in the quarter ended
June 30, 2008 by $1.2 billion (or 13.5%) due to:
(1) an unfavorable Foreign Currency Translation effect of
$1.2 billion; (2) $0.1 billion related to higher
volume; offset by (3) a favorable product mix of
$0.2 billion due to the movement away from higher cost
vehicles.
Automotive cost of sales increased in the year to date period
ended June 30, 2008 by $2.4 billion (or 14.5%) due to:
(1) an unfavorable Foreign Currency Translation effect of
$2.1 billion; (2) $0.2 billion related to higher
volume; offset by (3) a favorable product mix of
$0.2 billion.
Automotive cost of sales rate worsened slightly in the quarter
ended June 30, 2008 to 92.0% from 90.2% due to the slightly
disproportional effect of Foreign Currency Translation on Total
net sales and revenues and Automotive cost of sales.
Selling,
General, and Administrative Expense
Selling, general and administrative expense increased in the
quarter ended June 30, 2008 by $123 million (or 18.4%)
due to unfavorable Foreign Currency Translation of
$79 million and increased sales and marketing expenses of
$70 million.
Selling, general and administrative expense increased in the
year to date period ended June 30, 2008 by
$228 million (or 17.1%) due to unfavorable Foreign Currency
Translation of $142 million and increased sales and
marketing expenses of $90 million.
Income from continuing operations before income taxes, equity
income and minority interests
442
295
960
550
147
49.8
%
410
74.5
%
Equity income, net of tax
9
8
14
14
1
12.5
%
—
—
%
Minority interests, net of tax
(6
)
(7
)
(12
)
(14
)
1
14.3
%
2
14.3
%
Income from continuing operations before income taxes
$
445
$
296
$
962
$
550
$
149
50.3
%.
$
412
74.9
%.
Automotive cost of sales rate
89.0
%
88.9
%
86.8
%
88.6
%
0.1
%
n.m.
(1.8
)%
n.m
Net margin from continuing operations before income taxes,
equity income and minority interests
8.7
%
6.8
%
9.7
%
7.0
%
1.9
%
n.m.
2.7
%
n.m.
(Volume in thousands)
Production Volume (a)
276
233
519
455
43
18.5
%
64
14.1
%
Vehicle Sales (b):
Industry — LAAM
1,982
1,750
3,826
3,394
232
13.3
%
432
12.7
%
GMLAAM
346
294
670
564
52
17.7
%
106
18.7
%
GM market share — LAAM
17.5
%
16.8
%
17.5
%
16.6
%
0.7
%
n.m.
0.9
%
n.m.
GM market share — Brazil
20.0
%
20.1
%
20.4
%
20.1
%
(0.1
)%
n.m.
0.3
%
n.m.
n.m. = not meaningful
(a)
Production volume represents the number of vehicles manufactured
by our assembly facilities and also includes vehicles produced
by certain joint ventures.
(b)
Vehicle sales primarily represent sales to the ultimate customer.
Quarter
and Year to Date Period Ended June 30, 2008 Compared to
Quarter and Year to Date Period Ended June 30,2007
Industry
Vehicle Sales
Industry vehicle sales in the GMLAAM region increased in the
quarter and year to date period ended June 30, 2008 by
232,000 vehicles (or 13.3%) and 432,000 vehicles (or 12.7%),
respectively, due to strong growth throughout the region.
In the quarter ended June 30, 2008, growth was attributable
to increases in Brazil of 170,000 vehicles (or 28.9%), Argentina
of 31,000 vehicles (or 23.6%), the Middle East (excluding
Israel) of 26,000 vehicles (or 6.5%), Egypt of 20,000 vehicles
(or 36.0%), and Chile of 15,000 vehicles (or 28.4%), offset by
declines in Venezuela of 39,000 vehicles (or 34.2%), and in
South Africa of 24,000 vehicles (or 16.5%).
In the year to date period ended June 30, 2008, growth was
attributable to increases in Brazil of 325,000 vehicles (or
30.0%), the Middle East (excluding Israel) of 48,000 vehicles
(or 6.2%), Argentina of 39,000 vehicles (or 13.1%), Egypt of
37,000 vehicles (or 36.0%), offset by declines in Venezuela of
58,000 vehicles (or 27.4%), and in South Africa of 45,000
vehicles (or 14.7%).
Total Net
Sales and Revenue
Total net sales and revenue increased in the quarter ended
June 30, 2008 by $0.8 billion (or 17.9%) primarily due
to: (1) favorable effect of Foreign Currency Translation of
$0.3 billion, primarily related to the Brazilian Real and
Colombian Peso; (2) favorable vehicle pricing of
$0.2 billion; and (3) $0.2 billion in higher
volumes across most GMLAAM business units, including increased
revenues in Brazil and Argentina, partially offset by decreases
in Venezuela, Colombia and South Africa.
Total net sales and revenue increased in the year to date period
ended June 30, 2008 by $2.0 billion (or 24.8%) due to:
(1) favorable effect of Foreign Currency Translation of
$0.7 billion, primarily related to the Brazilian Real and
Colombian Peso; (2) $0.6 billion in higher volumes
across most GMLAAM business units; (3) favorable vehicle
pricing of $0.3 billion; and (4) $0.3 billion of
favorable product mix in our vehicle portfolio.
Automotive
Cost of Sales
Automotive cost of sales increased in the quarter ended
June 30, 2008 by $0.7 billion (or 18.1%) due to:
(1) unfavorable Foreign Currency Translation of
$0.3 billion; (2) higher content cost of
$0.1 billion; (3) increased volume impact in the
region of $0.1 billion; and (4) a combination of
higher engineering costs and exchange loss in Brazil and
increased logistics costs and foreign exchange transaction
losses on purchases of Treasury bills in Venezuela resulting in
an increase of $0.1 billion.
Automotive cost of sales increased in the year to date period
ended June 30, 2008 by $1.6 billion (or 22.2%) due to:
(1) unfavorable Foreign Currency Translation of
$0.6 billion; (2) increased volume impact in the
region of $0.4 billion; (3) unfavorable product mix
impact of $0.2 billion; (4) higher content cost of
$0.1 billion; and (5) the above mentioned combination
of higher engineering costs and exchange loss in Brazil and
increased logistics costs and foreign exchange transaction
losses on purchases of Treasury bills in Venezuela resulting in
an increase of $0.1 billion.
Selling,
General and Administrative Expense
Selling, general and administrative expense decreased in the
quarter ended June 30, 2008 by $54 million (or 18.2%)
due to: (1) a one time $66 million charge recorded in
the quarter ended June 30, 2007 by General Motors do Brasil
Ltd. (GM do Brasil) for additional retirement benefits under a
government sponsored pension plan; (2) a decrease of
$30 million in marketing, commercial and other
administrative expenses at GM do Brasil; offset by
(3) unfavorable Foreign Currency Translation impact of
$34 million; and (4) an unfavorable increase in the
cost of these expenses of $8 million.
Selling, general and administrative expense increased in the
year to date period ended June 30, 2008 by $25 million
(or 5.3%), resulting from: (1) unfavorable Foreign Currency
Translation effect of $51 million; (2) a
$22 million increase in marketing, commercial and other
administrative expenses due to general market expansion and
financial transaction taxes due to new legislation in Venezuela;
(3) an unfavorable increase in the cost of these expenses
of $16 million; offset by (4) the above mentioned one
time $66 million charge for additional retirement benefits
recorded by GM do Brasil in the quarter ended June 30, 2007.
Automotive
Interest and Other Income, Net
Automotive interest and other income, net increased in the
quarter ended June 30, 2008 by $12 million (or 11.0%)
due to: (1) favorable effect of Foreign Currency
Translation of $16 million, primarily related to the
Brazilian Real; (2) an increase of $5 million in net
interest income at General Motors Venezolana, C.A. (GM
Venezolana) from additional cash on hand; offset by (3) a
net decrease of $9 million attributed to the items
mentioned below.
In the quarter ended June 30, 2007, GM do Brasil recorded a
gain of $87 million associated with the recovery of
previously overpaid employee taxes and benefits and reversed a
previously established tax reserve for $34 million
associated with duties, federal excise tax and related matters
which were no longer required. In addition, GM do Brasil
recorded a $43 million charge for potential taxes related
to matters concerning improperly registered material included in
consignment contracts.
In the quarter ended June 30, 2008, GM do Brasil prepaid
part of its existing loan related to VAT taxes with the State
government of Rio Grande do Sul in Brazil, which resulted in a
pre-tax gain of $54 million. GM do Brasil also reversed a
tax reserve of $22 million due to winning a legal case on
overpaid social contribution taxes; which was offset by the
recording of a $7 million charge for potential taxes and
related matters concerning improperly registered material
included in consignment contracts.
Automotive interest and other income, net increased in the year
to date period ended June 30, 2008 by $31 million (or
24.8%) due to: (1) favorable effect of Foreign Currency
Translation of $18 million; (2) an increase of
$19 million in net interest income at GM Venezolana from
additional cash on hand; offset by (3) a net decrease of
$9 million attributed to the items mentioned above.
Automotive interest and other income (expense), net
(21
)
8
(19
)
16
(29
)
n.m.
(35
)
n.m.
Income (loss) from continuing operations before income taxes,
equity income and minority interests
(359
)
282
(157
)
376
(641
)
n.m.
(533
)
(141.8
)%
Equity income, net of tax
104
122
238
249
(18
)
(14.8
)%
(11
)
(4.4
)%
Minority interests, net of tax
92
(124
)
42
(202
)
216
174.2
%
244
120.8
%
Income (loss) from continuing operations before income tax
$
(163
)
$
280
$
123
$
423
$
(443
)
(158.2
)%
$
(300
)
(70.9
)%
Automotive cost of sales rate
98.2
%
88.1
%
93.5
%
89.4
%
10.1
%
n.m.
4.1
%
n.m.
Net margin from continuing operations before income taxes,
equity income and minority interests
(7.0
)%
5.3
%
(1.5
)%
3.9
%
(12.3
)%
n.m.
(5.4
)%
n.m.
(Volume in thousands)
Production Volume (a)(b)
619
571
1,231
1,115
48
8.4
%
116
10.4
%
Vehicle Sales (a)(c):
Industry — Asia Pacific
5,494
5,061
11,455
10,458
433
8.5
%
997
9.5
%
GMAP
387
338
798
726
49
14.6
%
72
9.9
%
GM market share — Asia Pacific (d)
7.0
%
6.7
%
7.0
%
6.9
%
0.3
%
n.m.
0.1
%
n.m.
GM market share — Australia
12.2
%
14.5
%
12.7
%
14.7
%
(2.3
)%
n.m.
(2.0
)%
n.m.
GM market share — China (d)
11.3
%
10.7
%
11.9
%
12.3
%
0.6
%
n.m.
(0.4
)%
n.m.
n.m. = not meaningful
(a)
Includes GM Daewoo, Shanghai GM and SAIC-GM-Wuling Automobile
Co., Ltd. (SGMW) joint venture production/sales. We own 34% of
SGMW and under the joint venture agreement have significant
rights as a member as well as the contractual right to report
SGMW sales in China as part of our global market share.
(b)
Production volume represents the number of vehicles manufactured
by our assembly facilities and also includes vehicles produced
by certain joint ventures.
(c)
Vehicle sales primarily represent sales to the ultimate customer.
Quarter
and Year to Date Period Ended June 30, 2008 Compared to
Quarter and Year to Date Period Ended June 30,2007
Industry
Vehicle Sales
Industry vehicle sales in the Asia Pacific region increased in
the quarter and year to date period ended June 30, 2008 by
433,000 vehicles (or 8.5%) and 997,000 vehicles (or 9.5%),
respectively, mainly due to sustained growth in China, India,
Thailand, Indonesia and Malaysia. However, the recent fuel price
increases and high inflation levels in several markets caused
the growth to moderate.
In the quarter ended June 30, 2008, industry vehicle sales
increased by 297,000 vehicles (or 13.7%) in China, 65,000
vehicles (or 14.4%) in India, 35,000 vehicles (or 30.9%) in
Indonesia and 23,000 vehicles (or 20.2%) in Malaysia.
In the year to date period ended June 30, 2008, industry
vehicle sales increased by 716,000 vehicles (or 16.9%) in China,
109,000 vehicles (or 11.0%) in India, 86,000 vehicles (or 43.7%)
in Indonesia and 49,000 vehicles (or 22.1%) in Malaysia.
Total Net
Sales and Revenue
Total net sales and revenue decreased in the quarter ended
June 30, 2008 by $0.1 billion (or 2.4%) due to:
(1) an unfavorable $0.4 billion immaterial adjustment
related to correcting our hedge accounting practices;
(2) an unfavorable mix of $0.2 billion primarily at GM
Daewoo; offset by (3) a $0.4 billion increase driven
by growth in export volumes from GM Daewoo and across most GMAP
business units; and (4) $0.1 billion favorable effect
of Foreign Currency Translation, primarily related to the
Australian Dollar. Refer to Note 17 to the condensed
consolidated financial statements for further information
regarding our hedging adjustment.
Total net sales and revenue increased in the year to date period
ended June 30, 2008 by $0.8 billion (or 7.8%) due to:
(1) $1.0 billion increase driven by growth in export
volumes from GM Daewoo and across most GMAP business units;
(2) $0.3 billion favorable effect of Foreign Currency
Translation, primarily related to the Australian Dollar; offset
by (3) an unfavorable $0.4 billion immaterial
adjustment related to correcting our hedge accounting practices
as mentioned above; and (4) an unfavorable mix of
$0.1 billion across most GMAP business units.
Automotive
Cost of Sales
Automotive cost of sales increased in the quarter ended June 30
2008 by $407 million (or 8.7%) due to a $363 million
increase driven by growth in export volumes from GM Daewoo and
higher volumes across most GMAP business units and a
$44 million unfavorable effect of Foreign Currency
Translation, primarily related to the Australian Dollar.
Automotive cost of sales increased in the year to date period
ended June 30 2008 by $1.1 billion (or 12.8%) due to a
$0.9 billion increase driven by growth in export volumes
from GM Daewoo and higher volumes across most GMAP business
units and a $0.2 billion unfavorable effect of Foreign
Currency Translation, primarily related to the Australian Dollar.
Selling,
General and Administrative Expense
Selling, general and administrative expense increased in the
quarter ended June 30 2008 by $76 million (or 21.5%) due to
increased selling expenses of $39 million, primarily at GM
Daewoo and GM Holden, Ltd. (GM Holden), and increased general
administrative expenses of $37 million in line with the
growth in business across various operations in the region.
Selling, general and administrative expense increased in the
year to date period ended June 30 2008 by $146 million (or
21.9%) due to increased selling expenses of $83 million,
primarily at GM Daewoo and GM Holden and increased general
administrative expenses of $63 million in line with the
growth in business across various operations in the region.
Automotive interest and other income, net decreased in the
quarter and year to date period ended June 30, 2008 by
$29 million and $35 million, respectively, due to
lower interest income.
Equity
Income, Net of Tax
Equity income, net of tax decreased in the quarter and year to
date period ended June 30, 2008 by $18 million (or
14.8%) and $11 million (or 4.4%), respectively, due to a
decline in our China joint ventures’ income as growth in
volume was more than offset by unfavorable mix and higher
expenses.
Minority
Interests, Net of Tax
Minority interests, net of tax decreased in the quarter ended
June 30 2008 by $0.2 billion (or 174.2%) as GM Daewoo
income declined by $0.4 billion primarily due to an
unfavorable immaterial adjustment related to correcting our
hedge accounting practices as mentioned above.
Minority interests, net of tax decreased in the year to date
period ended June 30, 2008 by $0.2 billion (or 120.8%)
as GM Daewoo income declined by $0.5 billion due to
$0.1 billion unfavorable mix and higher expenses and an
unfavorable immaterial adjustment related to correcting our
hedge accounting practices as mentioned above.
FIO
Financial Review
Our FIO business includes our share of the operating results of
GMAC’s lines of business consisting of Automotive Finance
Operations, Mortgage Operations, Insurance, and Other, which
includes GMAC’s Commercial Finance business and GMAC’s
equity investment in Capmark Financial Group (previously GMAC
Commercial Mortgage). Also included in FIO are the 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 we retained in connection
with the divestiture of our 51% equity interest in GMAC in
fiscal year 2006.
In the quarter and year to date period ended June 30, 2008,
we recorded impairment charges of $1.3 billion and
$2.8 billion, respectively, to reduce the carrying value of
our Common and Preferred Membership Interests in GMAC to fair
value. Refer to Note 11 to the condensed consolidated
financial statements for details on the valuation methodology
utilized to determine fair value.
In our 2007
10-K, we had
previously disclosed that we did not believe our investment in
GMAC was impaired. Many economic factors which were unstable at
December 31, 2007 may affect GMAC’s ability to
generate sustainable earnings and continue distributions on its
Preferred Membership Interests and, accordingly, impact our
assessment of impairment. The factors included:
•
The instability of the global credit and mortgage markets and
the related effect on GMAC’s Residential Capital, LLC
(ResCap) subsidiary as well as its automotive finance, insurance
and other operations;
•
The deteriorating conditions in the residential and home
building markets, including significant changes in the mortgage
secondary market, tightening underwriting guidelines and reduced
product offerings;
•
Recent credit downgrades of GMAC and ResCap and the effect on
their ability to raise capital necessary on acceptable terms; and
•
Effect of the expected near-term automotive market conditions on
GMAC’s automotive finance operations.
In the quarter ended March 31, 2008, all of these factors
showed further deterioration from December 31, 2007,
specifically:
•
Reduced commitment levels and lower effective advance rates for
secured funding at ResCap;
•
The necessity of GMAC continuing to provide funding and capital
infusions to its ResCap subsidiary;
Reduced consumer demand for automobiles, particularly
pick-up
trucks and sport utility vehicles;
•
Deterioration in the residual value of GMAC’s vehicles on
operating leases, resulting in an impairment charge of
$716 million; and
•
Increased instability of the European credit and mortgage
markets combined with the continuing instability of the global
markets caused significant losses at as well as liquidity issues
for ResCap.
Based on these factors, we believed that a decline in value of
our investments in GMAC occurred in the quarter and year to date
period ended June 30, 2008. Accordingly, we performed an
assessment under the provisions of Accounting Principles Board
Opinion (APB) No. 18, “The Equity Method of Accounting
for Investments in Common Stock” (APB No. 18), to
determine whether this decline in value was “other than
temporary.” We concluded that the decline was other than
temporary and, accordingly, we reduced the carrying value of our
investments to fair value as determined under Statement of
Financial Accounting Standards (SFAS) No. 157, “Fair
Value Measurements” (SFAS No. 157). Our
conclusions were reached after considering the severity of the
impairment and whether the value would recover in a reasonable
period. After reviewing these factors, we concluded that the
decline in value was other than temporary. This assessment
utilizes significant management judgment. We will continue to
monitor our investments to determine if future declines in value
are indicated and whether such declines are other than
temporary. Continued or decreased demand for automobiles,
further deterioration in the residual value of vehicles and
continued or increased instability of the global credit and
mortgage markets could further negatively impact GMAC’s
lines of businesses, and result in future impairments of our
investment in GMAC Common and Preferred Membership Interests.
However, such declines may not result in further impairment
charges if we determine they are temporary.
In the quarter ended June 30, 2008, residual values of
sport utility vehicles and fullsize
pick-up
trucks experienced a sudden and significant decline as a result
of a shift in customer preference to passenger cars and
crossover vehicles and away from sport utility vehicles and
fullsize
pick-up
trucks. This decline in residual values is the primary factor
responsible for the impairment charge of $0.7 billion and
$0.1 billion recorded by GMAC and us, respectively, in the
quarter ended June 30, 2008 related to Equipment on
operating leases, net. In addition to the impairment charges
recorded, GMNA increased residual support and risk sharing
accruals by $1.6 billion related to its obligations under
residual support and risk sharing agreements related to
Equipment on operating leases, net.
Quarter
and Year to Date Period Ended June 30, 2008 Compared to
Quarter and Year to Date Period Ended June 30,2007
FIO reported loss before income taxes of $2.6 billion in
the quarter ended June 30, 2008 as compared to income
before income taxes of $240 million in the corresponding
period in 2007. FIO reported a loss before income taxes of
$4.2 billion in the year to date period ended June 30,2008 compared to income before income taxes of $160 million
in the corresponding period in 2007. Refer to the commentary
below for a detailed discussion of the events and factors
contributing to this change.
GMAC reported a net loss of $2.5 billion in the quarter
ended June 30, 2008, compared to net income of
$293 million in the corresponding period in 2007, and a net
loss of $3.1 billion in the year to date period ended
June 30, 2008, compared to a net loss of $12 million
in the corresponding period in 2007. GMAC’s 2008 results
reflect a $0.7 billion impairment of vehicle operating
lease assets in its North American operations as a result of
declining vehicle sales and lower used vehicle prices for
certain segments. Results also reflect significant losses
recognized by ResCap related to asset sales, unfavorable
valuation adjustments and higher loan loss provisions, due to
continued deterioration in the mortgage market. The losses were
partially offset by a gain on the extinguishment of debt of
$0.6 billion and $1.1 billion in the quarter and year
to date period ended June 30, 2008, respectively.
Global Automotive Finance operations experienced a net loss in
the quarter and year to date period ended June 30, 2008.
Weaker performance was primarily driven by a $0.7 billion
impairment on operating lease assets in its North American
operations, which more than offset profits in its International
operations. Additional factors affecting results were an
increase in the provision for credit losses, due to increased
severity, and lower gains on sales.
ResCap’s results for the quarter and year to date period
ended June 30, 2008 were adversely affected by continued
pressure in the domestic housing markets and the foreign
mortgage and capital markets. The adverse conditions resulted in
lower net interest margins, lower loan production, significant
realized losses on sales of mortgage loans, fair value declines
related to mortgage loans
held-for-sale
and trading securities, impairments on real estate investments,
and reduced gains associated with the disposition of real estate
acquired through foreclosure. As these market conditions
persist, particularly in the foreign markets, these unfavorable
effects on its results of operations may continue.
Insurance Operations’ net income in the quarter ended
June 30, 2008 increased in comparison with the
corresponding period in 2007 primarily due to the favorable
resolution of a tax audit. The increase was partially offset by
an increase in incurred losses partially related to
weather-related events. Net income for the year to date period
ended June 30, 2008 decreased in comparison with the
corresponding period in 2007 primarily due to an increase in
losses.
GMAC’s Other operations’ results decreased in the
quarter and year to date period ended June 30, 2008
compared to the corresponding period in 2007, primarily due to
increased interest expense for corporate activities due to
increased borrowings, losses experienced by its Commercial
Finance Group, and a decrease in equity investment income.
FIO’s Other Financing reported loss before income taxes of
$54 million in the quarter ended June 30, 2008 as
compared to income before income taxes of $86 million in
the corresponding period in 2007. The decrease is primarily due
to the $105 million impairment charge related to equipment
on operating leases in the quarter ended June 30, 2008. FIO
Other Financing reported income before income taxes of
$37 million in the year to date period ended June 30,2008 compared to income before income taxes of $140 million
in the corresponding period in 2007.
FIO’s loss in the quarter and year to date period ending
June 30, 2008 included the impairment charges related to
our investment in GMAC Common and Preferred Membership Interests
discussed above. In the quarter and year to date period ended
June 30, 2008, we recorded impairment charges of
$0.7 billion and $2.0 billion, respectively, related
to our investment in GMAC Common Membership Interests, and in
the quarter and year to date period ended June 30, 2008 we
recorded impairment charges of $0.6 billion and
$0.8 billion, respectively, related to our investment in
GMAC Preferred Membership Interests.
Automotive interest and other income (expense), net
(74
)
155
(141
)
226
(229
)
(147.7
)%
(367
)
(162.4
)%
Loss from continuing operations before income taxes, other
equity income and minority interests
(3,499
)
(579
)
(4,528
)
(789
)
(2,920
)
n.m.
(3,739
)
n.m.
Income tax expense (benefit)
1,045
(364
)
1,690
(431
)
1,409
n.m.
2,121
n.m.
Equity income, net of tax
—
—
—
2
—
n.m.
(2
)
(100.0
)%
Minority interests, net of tax
(1
)
—
(1
)
(1
)
(1
)
n.m.
—
n.m.
Net loss
$
(4,545
)
$
(215
)
$
(6,219
)
$
(357
)
$
(4,330
)
$
(5,862
)
n.m. = not meaningful
Corporate and Other includes certain centrally recorded income
and costs, such as interest and income taxes, corporate
expenditures, the elimination of inter-segment transactions and
costs related to pension and OPEB for Delphi retirees and
retirees of other divested businesses for which we have retained
responsibility.
Quarter
and Year to Date Period Ended June 30, 2008 Compared to
Quarter and Year to Date Period Ended
June 30, 2007
Automotive cost of sales increased in the quarter ended
June 30, 2008 by $142 million, primarily due to
$190 million of unfavorable Foreign Currency Translation,
partially offset by decreased legacy costs. Automotive cost of
sales decreased in the year to date period ended June 30,2008 by $55 million (or 48.2%), primarily due to lower
legacy costs of $63 million.
Selling, general and administrative expense increased in the
quarter ended June 30, 2008 by $0.3 billion (or
196.9%) primarily from a charge of $0.3 billion related to
settlement of legal issues. The charge for settlement of legal
issues and an increase of $0.1 billion for consulting and
other outside services was the primary cause for the increase of
$0.4 billion (or 125.5%) in Selling, general and
administrative costs in the year to date period ended
June 30, 2008.
Other expenses increased in the quarter and year to date period
ended June 30, 2008 by $2.2 billion and
$3.0 billion, respectively, primarily due to additional
charges recorded for Delphi. In the quarter ended June 30,2008, charges were comprised of $2.8 billion related to the
Delphi Benefit Guarantee Agreements and $0.1 billion
related to transactions with other FIO. In the corresponding
period in 2007, Other expenses related solely to charges of
$0.6 billion in connection with the Delphi Benefit
Guarantee Agreements. In the year to date period ended
June 30, 2008, Other expenses included $3.5 billion
related to the Delphi Benefit Guarantee Agreements and
$0.1 billion related to transactions with other FIO.
Automotive interest and other income (expense), net decreased in
the quarter and year to date period ended June 30, 2008 by
$0.2 billion (or 147.7%) and $0.4 billion (or 162.4%),
respectively, due to: (1) lower interest income, driven by
lower interest
rates and cash balances; (2) favorable interest recognized
in 2007 in connection with various tax related items; partially
offset by (3) a gain of $50 million from the sale of
our common equity interest in Electro-Motive Diesel, Inc.
The increase in Income tax expense (benefit) in the quarter and
year to date periods ended June 30, 2008 primarily resulted
from two factors: (1) no longer recognizing the income tax
benefit of losses in the United States, Canada, Germany, Spain
and the United Kingdom due to the effect of full valuation
allowances in these jurisdictions; and (2) the effect of
recording valuation allowances against our net deferred tax
assets in Spain and the United Kingdom as it relates to the year
to date period.
In the quarter and year to date period ended June 30, 2007,
we concluded that it was more likely than not that we would
realize our net deferred tax assets in the United States,
Canada, Germany, Spain and the United Kingdom and, accordingly,
continued to record tax benefits from losses incurred and tax
expense related to income generated in these jurisdictions.
However, in the quarter ended September 30, 2007, our
assessment changed with regard to the United States, Canada and
Germany and we concluded that it was more likely than not that
we would not generate sufficient taxable income to realize our
net deferred tax assets in these tax jurisdictions, either in
whole or in part, and, accordingly, recorded full valuation
allowances against these net deferred tax assets. This change
was primarily due to a decline in actual results from our
previous forecast and a significant downward revision in our
near-term (2008 and 2009) financial outlook.
In addition, in the quarter ended March 31, 2008, we
determined that it was more likely than not that we would not
realize our net deferred tax assets, in whole or in part, in
Spain and the United Kingdom and recorded full valuation
allowances totaling $0.4 billion against our net deferred
tax assets in these tax jurisdictions. The following summarizes
the significant changes occurring in the quarter ended
March 31, 2008, which resulted in our decision to record
these full valuation allowances.
In the United Kingdom, we were in a three-year adjusted
cumulative loss position and our near-term and mid-term
financial outlook for automotive market conditions was more
challenging than we believed at December 31, 2007. Our
outlook deteriorated based on our projections of the combined
effects of the challenging foreign exchange environment and
unfavorable commodity prices. Additionally, we increased our
estimate of the potential costs that may arise from the
regulatory and tax environment relating to carbon dioxide
(CO2)
emissions in the European Union, including legislation enacted
or announced during 2008.
In Spain, although we were not currently in a three-year
adjusted cumulative loss position, our near-term and mid-term
financial outlook deteriorated significantly in the three months
ended March 31, 2008 such that we anticipated being in a
three-year adjusted cumulative loss position in the near- and
mid-term. In Spain, as in the United Kingdom, we were
unfavorably affected by the combined effects of the foreign
exchange environment, commodity prices and our estimate of the
potential costs that may arise from the regulatory and tax
environment relating to
CO2
emissions.
Based on our analysis, we concluded that it was more likely than
not that we would not realize our net deferred tax assets, in
whole or in part, in the United Kingdom and Spain and recorded
full valuation allowances. As a result of the full valuation
allowances, we did not record tax benefits for losses incurred
in these tax jurisdictions in the quarter and year to date
period ended June 30, 2008.
A description of our method to determine if our deferred tax
assets are realizable is included in Critical Accounting
Estimates — Deferred Taxes later in this MD&A.
Key
Factors Affecting Future and Current Results
Settlement
Agreement
In October 2007, we signed a Memorandum of
Understanding — Post-Retirement Medical Care (Retiree
MOU) with the UAW, now superseded by the settlement agreement
entered into in February 2008 (Settlement Agreement). The
Settlement Agreement provides that responsibility for providing
retiree health care will permanently shift from us to a new
retiree plan funded by a new independent Voluntary Employee
Beneficiary Association trust (New VEBA). The United States
District Court for the Eastern District of Michigan certified
the class and granted preliminary approval of the Settlement
Agreement and we
mailed notices to the class in March 2008. The fairness hearing
was held on June 3, 2008 and on July 31, 2008 the
court approved the Settlement Agreement. All appeals, if any,
are expected to be exhausted no later than January 1, 2010.
When fully implemented, the Settlement Agreement will cap our
payment for retiree healthcare obligations to UAW associated
employees, retirees and dependents as defined in the Settlement
Agreement; will supersede and replace the 2005 UAW Health Care
Settlement Agreement, as discussed in our 2007
10-K; and
will transfer responsibility for administering retiree
healthcare benefits for these individuals to a new retiree
health care plan (the New Plan) to be established and funded by
the New VEBA. Before it can become effective, the Settlement
Agreement is subject to the exhaustion of any appeals of the
July 31, 2008 court approval and the completion of
discussions between us and the SEC regarding whether the
accounting treatment for the transactions contemplated by the
Settlement Agreement is on a basis we find to be reasonably
satisfactory. In light of these contingencies, no recognition of
the Settlement Agreement has been made in our condensed
consolidated financial statements. The Settlement Agreement
provides that on the later of January 1, 2010 or final
court approval of the Settlement Agreement, including the
expiration of all appeals (Final Settlement Date), we will
transfer our obligations to provide covered UAW employees with
post retirement medical benefits to the New Plan.
In accordance with the Settlement Agreement, effective
January 1, 2008 for bookkeeping purposes only, we divided
the existing internal VEBA into two bookkeeping accounts. One
account consists of the percentage of the existing internal
VEBA’s assets at January 1, 2008 that is equal to the
estimated percentage of our hourly OPEB obligation covered by
the existing internal VEBA attributable to non-UAW represented
employees and retirees, their eligible spouses, surviving
spouses and dependents (Non-UAW Related Account) and had a
balance of $1.2 billion. The second account consists of the
remaining percentage of the assets in the existing internal VEBA
at January 1, 2008 (UAW Related Account) and had a balance
of $14.5 billion. No amounts will be withdrawn from the UAW
Related Account, including its investment returns, from
January 1, 2008 until the transfer of assets to the New
VEBA.
In February 2008, pursuant to the Settlement Agreement, we
issued a $4.0 billion short-term note (Short-Term Note) to
LBK, LLC, a Delaware limited liability company of which we are
the sole member (LBK). The Short-Term Note pays interest at a
rate of 9% and matures on the date that the face amount of the
Short-Term Note is paid with interest to the New VEBA in
accordance with the terms of the Settlement Agreement. LBK will
hold the Short-Term Note until maturity.
In February 2008, pursuant to the Settlement Agreement, we
issued $4.4 billion principal amount of our 6.75%
Series U Convertible Senior Debentures due
December 31, 2012 (Convertible Note) to LBK. LBK will hold
the Convertible Note until it is transferred to the New VEBA in
accordance with the terms of the Settlement Agreement. Interest
on the Convertible Note is payable semiannually. In accordance
with the Settlement Agreement, LBK would have transferred any
interest it receives on the Convertible Note to a temporary
asset account we maintain. The funds in the temporary asset
account would have been transferred to the New VEBA in
accordance with the terms of the Settlement Agreement.
As allowed by the Settlement Agreement and consented to by the
Class Counsel, we are deferring approximately
$1.7 billion of payments contractually required under the
Settlement Agreement to the New VEBA including interest on the
above mentioned Convertible Note which would have been payable
to the temporary asset accounts in 2008 and 2009. These payments
are deferred until the Final Settlement Date and will be
increased by an annual interest factor of 9%.
In conjunction with the issuance of the Convertible Note, we
entered into certain cash-settled derivative instruments
maturing on June 30, 2011 with LBK that will have the
economic effect of reducing the conversion price of the
Convertible Note from $40 to $36. These derivative instruments
will also entitle us to partially recover the additional
economic value provided if our common stock price appreciates to
between $63.48 and $70.53 per share by June 30, 2011 and to
fully recover the additional economic value provided if our
common stock price reaches $70.53 per share or above by
June 30, 2011. Pursuant to the Settlement Agreement, LBK
will transfer its interests in the derivatives to the New VEBA
when the Convertible Note is transferred from LBK to the New
VEBA following the Implementation Date.
Because LBK is a wholly-owned consolidated subsidiary, these
securities, and the related interest income and expense, have
been eliminated in our condensed consolidated financial
statements and will continue to be until the Final Settlement
Date.
Beginning in 2009, we may be required, under certain
circumstances, to contribute an additional $165 million per
year, limited to a maximum of an additional 19 payments, to
either the temporary asset account or the New VEBA (when
established). Such contributions will be required only if annual
cash flow projections show that the New VEBA will become
insolvent on a rolling
25-year
basis. However, the potential $165 million contribution due
in 2009 will be deferred until the Final Settlement Date and
increased by an annual interest rate of 9%. At any time, we will
have the option to prepay all remaining contingent
$165 million payments.
Additionally, at the Final Settlement Date, which is expected to
be in 2010, we would be required to transfer $7.0 billion,
including deferred amounts discussed above, subject to
adjustment, to the New VEBA. Further, at that time, we may
either transfer an additional $5.6 billion to the New VEBA,
subject to adjustment, or we may instead opt to make annual
payments of varying amounts between $421 million and
$3.3 billion through 2020. At any time after the Final
Settlement Date we will have the option to prepay all remaining
payments.
2008
Special Attrition Programs and U.S. Facility
Idlings
In February 2008, we entered into agreements with the UAW and
the International Union of Electronic, Electrical, Salaried,
Machine and Furniture Workers of America-Communications Workers
of America (IUE-CWA) regarding special attrition programs which
were intended to further reduce the number of hourly employees.
The UAW attrition program (2008 UAW Special Attrition Program)
offered to our 74,000 UAW-represented employees consisted of
wage and benefit packages for normal and voluntary retirements,
buyouts or pre-retirement employees with 26 to 29 years of
service. In addition to their vested pension benefits, those
employees that were retirement eligible will receive a lump sum
payment, depending upon job classification, that will be funded
from our U.S. hourly pension plan. For those employees not
retirement eligible, other buyout options were offered. The
terms offered to the 2,300 IUE-CWA represented employees (2008
IUE-CWA Special Attrition Program) are similar to those offered
through the 2008 UAW Special Attrition Program. As a result of
the 2008 UAW Special Attrition Program and 2008 IUE-CWA Special
Attrition Program (2008 Special Attrition Programs), we
recognized curtailment losses and other special termination
benefits in the quarter and year to date period ended
June 30, 2008 of $3.0 billion and $3.2 billion,
respectively, which were recorded in Automotive cost of sales.
Refer to Note 8 to the condensed consolidated financial
statements for additional detail on the financial statement
effects of the 2008 Special Attrition Programs.
Through June 30, 2008, 18,700 employees have elected to
participate in the 2008 Special Attrition Programs, with most
employees leaving active employment on or before July 1,2008. The expected cash expenditure of the 2008 Special
Attrition Program is $0.3 billion of which
$0.1 billion was incurred in the quarter ended
June 30, 2008 and $0.2 billion is expected to be spent
over the remainder of 2008. We expect total cash expenditures
related to the capacity actions to be $0.9 billion, of
which we plan to spend $0.1 billion in 2008,
$0.2 billion in 2009, and $0.6 billion beyond 2009.
The ongoing structural cost reductions associated with the 2008
Special Attrition Programs are a component of the actions
necessary for us to reach our stated goal of reducing structural
costs to 25% of global automotive revenues by 2010.
Delphi
Bankruptcy
Background
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’s financial distress and
Chapter 11 filing posed significant risks to us for two
principal reasons: (1) our production operations rely on
systems, components and parts provided by Delphi, our largest
supplier, and could be substantially disrupted if Delphi
rejected its GM supply agreements or its labor agreements and
thereby affected the availability or price of the required
systems, components or parts; and (2) in connection with
our 1999 spin-off of Delphi, we provided limited guarantees of
pension and OPEB benefits for hourly employees represented by
the UAW, the IUE-CWA, and the United Steel Workers (USW) who
were transferred to Delphi from GM (Benefit Guarantees), which
could have been triggered in connection with the Chapter 11
proceedings.
Since the filing, we have continued to work with Delphi, its
unions and other interested parties to negotiate a satisfactory
resolution to Delphi’s Chapter 11 restructuring
process, including several interim agreements and the labor and
settlement agreements discussed below.
Labor
Settlements
In June 2007, we entered into a Memorandum of Understanding with
Delphi and the UAW (Delphi UAW MOU) which included terms
relating to the consensual triggering of the UAW Benefit
Guarantee Agreement as well as additional terms relating to
Delphi’s restructuring. Under the Delphi UAW MOU we also
agreed to pay for certain healthcare costs of Delphi retirees
and their beneficiaries in order to provide a level of benefits
consistent with those provided to our retirees and their
beneficiaries from the Mitigation Plan VEBA. We also committed
to pay $450 million to settle a UAW claim asserted against
Delphi, which the UAW has directed us to pay directly to the GM
UAW VEBA trust. Such amount is expected to be amortized to
expense over future years. The UAW Benefit Guarantee Agreements
and the related Indemnification Agreement were recently extended
until September 30, 2008. We also agreed that the
applicable Benefit Guarantees will be triggered for certain UAW
employees if Delphi terminates its pension plan, ceases to
provide ongoing credited services, or fails or refuses to
provide postretirement medical benefits for those UAW employees
at any time before Delphi’s Plan of Reorganization (POR) or
a similar plan is consummated.
In August 2007, we entered into a Memorandum of Understanding
with Delphi and the IUE-CWA (Delphi IUE-CWA MOU), and we entered
into two separate Memoranda of Understanding with Delphi and the
USW (collectively the USW MOUs). The terms of the Delphi IUE-CWA
MOU and the USW MOUs are similar to the Delphi UAW MOU with
regard to the consensual triggering of the Benefit Guarantee
Agreements.
Delphi-GM
Settlement Agreements
We have entered into comprehensive settlement agreements with
Delphi (Delphi-GM Settlement Agreements) consisting of a Global
Settlement Agreement, as amended (GSA) and a Master
Restructuring Agreement, as amended (MRA) that would become
effective upon Delphi’s substantial consummation of its POR
and our receipt of consideration provided for in the POR. The
GSA is intended to resolve outstanding issues between Delphi and
us that have arisen or may arise before Delphi’s emergence
from Chapter 11. The MRA is intended to govern certain
aspects of our commercial relationship following Delphi’s
emergence from Chapter 11. The more significant items
contained in the Delphi-GM Settlement Agreements include our
commitment to:
•
Reimburse Delphi for its costs to provide OPEB to certain of
Delphi’s hourly retirees from and after January 1,2007 through the date that Delphi ceases to provide such
benefits;
•
Reimburse Delphi for the “normal cost” of credited
service in Delphi’s pension plan between January 1,2007 and the date its pension plans are frozen;
•
Assume $1.5 billion of net pension obligations of Delphi
and Delphi providing us a $1.5 billion note receivable;
•
Reimburse Delphi for all retirement incentives and half of the
buyout payments made pursuant to the various attrition program
provisions and to reimburse certain U.S. hourly buydown payments
made to hourly employees of Delphi;
•
Award future product programs to Delphi and provide Delphi with
ongoing preferential sourcing for other product programs, with
Delphi re-pricing existing and awarded business;
•
Reimburse certain U.S. hourly labor costs incurred to produce
systems, components and parts for us from October 1, 2006
through September 14, 2015 at certain U.S. facilities owned
or to be divested by Delphi (Labor Cost Subsidy);
•
Reimburse Delphi’s cash flow deficiency attributable to
production at certain U.S. facilities that continue to produce
systems, components and parts for us until the facilities are
either closed or sold by Delphi (Production Cash Burn Support);
and
•
Guarantee a minimum recovery of the net working capital that
Delphi has invested in certain businesses held for sale.
In addition, Delphi agreed to provide us or our designee with an
option to purchase all or any of certain Delphi businesses for
one dollar if such businesses have not been sold by certain
specified deadlines. If such a business is not sold either to a
third party or to us or any affiliate pursuant to the option by
the applicable deadline, we (or at our option, an affiliate)
will be deemed to have
exercised the purchase option, and the unsold business,
including materially all of its assets and liabilities, will
automatically transfer to the GM “buyer.” Similarly,
under the Delphi UAW MOU if such a transfer has not occurred by
the applicable deadline, responsibility for the UAW hourly
employees of such an unsold business affected would
automatically transfer to us or our designated affiliate.
Delphi
POR
The Bankruptcy Court entered an order on January 25, 2008
confirming the POR, including the Delphi-GM Settlement
Agreements. On April 4, 2008, Delphi announced that
although it had met the conditions required to substantially
consummate its POR, including obtaining $6.1 billion in
exit financing, Delphi’s plan investors refused to
participate in a closing that was commenced but not completed on
that date, thereby making it unlikely that Delphi will emerge
from bankruptcy in the near-term. Under Delphi’s POR and as
a result of our agreed participation in Delphi’s exit
financing, our total recovery would have consisted of
$300 million in cash, $2.7 billion in second lien debt
and $1.0 billion in junior preferred convertible stock at
the POR value. The second lien debt includes $1.5 billion
relating to our assumption of $1.5 billion of Delphi net
pension obligations. If the POR had been consummated, we would
have released our claims against Delphi, and we would have
received an unconditional release of any alleged claims against
us by Delphi. As with other customers, certain of our 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 the course
of discussions since April 2008, it has become clear that based
on negotiations with Delphi and other stakeholders that the
structure and amounts of our distributions would change.
We continue to work with Delphi and its stakeholders to
facilitate Delphi’s efforts to emerge from bankruptcy. As
part of this effort in May 2008, we agreed to advance up to
$650 million to Delphi during 2008. In August 2008, we
agreed to increase the amount we could advance to
$950 million during 2008, which is within the amounts we
would owe under the Delphi-GM Settlement Agreements if Delphi
were to emerge from bankruptcy by December 2008. We will receive
an administrative claim for funds we advance to Delphi under
this arrangement. We also are discussing with Delphi the
possible implementation of the Delphi-GM Settlement Agreements
in the near-term.
Risks if
Delphi Cannot Emerge From Bankruptcy
If Delphi is not successful in emerging from bankruptcy, we
could be subject to many of the risks that we have reported
since Delphi’s 2005 bankruptcy filing. For example, Delphi
could seek to again reject or threaten to reject individual
contracts with us, either for the purpose of exiting specific
lines of business or in an attempt to increase the price we pay
for certain parts and components. Until a Delphi POR is
consummated, we intend to continue to protect our right of
setoff against the $1.15 billion we owed to Delphi in the
ordinary course of 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. We cannot provide any
assurance that we will be able to setoff such amounts fully or
partially. To date, we have recorded setoffs of approximately
$54 million against that pre-petition obligation, with
Delphi’s agreement. We have also filed a Consolidated Proof
of Claim, in accordance with the Bankruptcy Court’s
procedures, setting forth our claims (including the claims of
various GM subsidiaries) against Delphi and the other debtor
entities, although the exact amount of our 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.
We would also have a claim against Delphi for $3.8 billion
related to some of the costs we paid 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.
GM
Contingent Liability
In the quarter and year to date period ended June 30, 2008
we recorded charges of $2.8 billion and $3.5 billion,
respectively, to increase our net liability related to the
Benefit Guarantee Agreements, primarily due to expectations of
increased obligations
and updated estimates reflecting uncertainty around the nature,
value and timing of our recoveries upon emergence of Delphi from
bankruptcy. In addition, in the quarter ended June 30,2008, we recorded a charge of $294 million primarily in
connection with the Delphi-GM Settlement Agreements. Since 2005,
we have recorded total charges of $11.0 billion in Other
expenses in connection with the Benefit Guarantee Agreements and
Delphi-GM Settlement Agreements. These charges are net of
estimated recoveries that would be due to us upon emergence of
Delphi from bankruptcy. Our commitments under the Delphi-GM
Settlement Agreements for the Labor Cost Subsidy and Production
Cash Burn Support in the quarter ended June 30, 2008 are
included in the $294 million charge and are expected to
result in additional expense of between $250 million and
$400 million annually in 2009 through 2015, which will be
treated as a period cost and expensed as incurred as part of
Automotive cost of sales. Due to the uncertainties surrounding
Delphi’s ability to emerge from bankruptcy, it is
reasonably possible that additional losses could arise in the
future, but we currently are unable to estimate the amount or
range of such losses, if any.
Investigations
As previously reported, we are cooperating with federal
governmental agencies in connection with a number of
investigations.
The SEC has issued subpoenas and information requests to us in
connection with various matters including restatements of our
previously issued financial statements in connection with our
accounting for certain foreign exchange contracts and
commodities contracts, our financial reporting concerning
pension and OPEB, certain transactions between us and Delphi,
supplier price reductions or credits and any obligation we may
have to fund pension and OPEB costs in connection with
Delphi’s proceedings under Chapter 11 of the
Bankruptcy Code. 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.
We have produced documents and provided testimony in response to
the subpoenas and will continue to cooperate 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 U.S. 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 our securities consider cash
flows of the GMA and FIO businesses to be relevant measures in
the analysis of our various securities that trade in public
markets. Accordingly, we provide supplemental statements of cash
flows to aid users of our 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 Other
Operations” line items shown in the table below. Following
are such statements for the year to date periods ended
June 30, 2008 and 2007:
We continue to believe that we have sufficient liquidity and
financial flexibility to meet our 2008 and 2009 funding
requirements, even in light of our assumption for liquidity
planning purposes of U.S. light vehicle automotive industry
outlook of 14.0 million and a market share of 21% in
2008-2009
and losses for the second quarter and year to date 2008, which
would be accompanied by significant negative cash flow. We
expect, however, that our cash requirements going forward in
2008 and 2009 will be substantial, including among other
possible demands:
•
Costs to implement long-term cost-cutting and restructuring
plans such as capacity reduction programs and assistance to
Delphi;
•
Continuing capital expenditures of $8.0 billion for 2008
and $7.0 billion in 2009;
•
Scheduled U.S. term debt and lease maturities through 2009 of
$2.9 billion; and
Scheduled cash contributions of $7.0 billion at the Final
Settlement Date for the benefit of the New VEBA trust to be
established pursuant to the Settlement Agreement regarding
postretirement medical care.
We are pursuing measures to bolster liquidity to fund the
significant cash requirements of our operating and capital plans
in the current U.S. automotive environment and in the event of a
more prolonged U.S. downturn. The measures include a combination
of operating and related actions, as well as asset sales and
capital market activities.
On July 15, 2008, we announced a number of initiatives
aimed at conserving or generating approximately
$15.0 billion of cash through the end of 2009. These
actions, along with access to $4.5 billion of committed
U.S. credit lines, are expected to provide ample liquidity
through 2009. Through a number of internal operating changes and
other actions, we expect to generate approximately
$10.0 billion of cumulative cash savings by the end of
2009, versus our original plans through the following measures:
•
Salaried employment savings (estimated $1.5 billion
impact) — We plan further salaried headcount
reductions in the U.S. and Canada in 2008, which will be
achieved through normal attrition, early retirements, mutual
separation programs and other tools. In addition, health care
coverage for U.S. salaried retirees over 65 will be eliminated,
effective January 1, 2009. Affected retirees and surviving
spouses will receive a pension increase from our overfunded U.S.
salaried plan to help offset costs of Medicare and supplemental
coverage. In addition, there will be no new base compensation
increases for U.S. and Canadian salaried employees for the
remainder of 2008 and 2009. We are also eliminating
discretionary cash bonuses for the executive group in 2008.
•
GMNA structural cost reductions (estimated $2.5 billion
impact) — The reductions will be partially
achieved through further adjustments in truck capacity and
related component, stamping and powertrain capacity in response
to lower U.S. industry volume. Truck capacity is expected
to be reduced by 300,000 vehicles by the end of 2009. We will
also reduce and consolidate sales and marketing budgets, with a
focus on protecting launch products and brand advertising.
Engineering spending in 2008 and 2009 will be held at
2006-2007
levels, substantially lower than original plans. These operating
actions, combined with the benefits of the 2007 GM-UAW labor
agreement, are targeted to reduce North American structural
costs from $33.2 billion in 2007 to approximately
$26.0 billion to $27.0 billion in 2010, a reduction of
$6.0 billion to $7.0 billion.
•
Capital expenditure reductions (estimated $1.5 billion
impact) — We will reduce capital expenditures to
$7.0 billion in 2009 versus prior plans of
$8.5 billion. The major components of the reduction are
related to a delay in the next generation large
pick-up
truck and sport utility vehicle programs, as well as V-8 engine
development. There will also be reductions in non-product
capital spending. These reductions will be partially offset by
increases in powertrain spending related to alternative
propulsion, small displacement engines and fuel economy
technologies. The expected 2009 capital spending level will
still be greater than the annual spending levels in 2005 through
2007 (after excluding GMT 900 fullsize
pick-up
trucks and sport utility vehicles). Beyond 2009, capital
expenditures are expected to stabilize in the $7.0 billion
to $7.5 billion range (excluding China which is self funded
with our joint venture partner).
•
Working capital improvements (estimated $2.0 billion
impact) — Actions are being taken to improve
working capital by approximately $2.0 billion in North
America and Europe, primarily related to the reduction of raw
material,
work-in-progress
and finished goods inventory levels as well as lean inventory
practices at parts warehouses. GMNA and GME inventories will be
reduced by $1.5 billion and $0.5 billion,
respectively, from planned year end 2008 levels.
•
UAW VEBA payment deferrals (estimated $1.7 billion
impact) — We will defer approximately
$1.7 billion of payments that had been scheduled to be made
to a temporary asset account over 2008 and 2009 for the
establishment of the new UAW VEBA. The outstanding payable
resulting from this deferral will accrue interest at 9% per
annum. The UAW and class counsel have agreed that the deferral
will not represent a change in or breach of the Settlement
Agreement. We expect that the VEBA agreement will be implemented
on the later of January 1, 2010 or final court approval of
the Settlement Agreement. Within 20 business days of the Final
Settlement Date, deferred payments, plus interest plus
additional contractual amounts will be due to the trust. These
amounts will total approximately $7.0 billion.
•
Dividend suspension (estimated $0.8 billion
impact) — Our Board of Directors has suspended
dividends on our common stock.
In addition to the operating changes and other actions, we
expect to raise additional liquidity of $4.0 billion to
$7.0 billion through asset sales and financing activities.
•
Asset sales — We are undertaking a broad global
assessment of our assets for possible sale or monetization,
which is expected to generate approximately $2.0 billion to
$4.0 billion of additional liquidity. We believe there is
significant liquidity potential from asset sales, which can be
achieved without negatively impacting our strategic direction.
We have engaged outside advisors to evaluate our alternatives.
•
Capital market activities — We will continue to
access the global capital markets on an opportunistic basis. We
are targeting at least $2.0 billion to $3.0 billion of
financing. We have gross unencumbered assets of over
$20.0 billion, which could support a debt offering, or
multiple offerings well in excess of the initially targeted
$2.0 billion to $3.0 billion, depending on market
conditions. Such assets include stock of foreign subsidiaries,
brands, our investment in GMAC, and real estate.
Available
Liquidity
Automotive and Other (Automotive) available liquidity includes
cash balances, marketable securities, and readily available
assets of our VEBA trusts. At June 30, 2008, available
liquidity was $21.0 billion compared with
$27.3 billion at December 31, 2007 and
$27.2 billion at June 30, 2007. 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.
As discussed above, we are experiencing a reduction in vehicle
sales in the North American and Western European markets which
results in an unfavorable impact on working capital. In the
U.S., we generally recognize revenue and collect the associated
receivable shortly after production, but pay our suppliers
approximately 47 days later. Accordingly, we consistently
have negative working capital. During periods of declining sales
and production this will result in outflows of cash greater than
collections of accounts receivable, as we pay suppliers for
materials on which we have previously recognized revenue and
collected the associated receivable. As production and sales
stabilize, this impact also stabilizes and we return to a more
regular pattern of working capital changes. Depending on the
severity and timing of any further industry declines, the
associated negative operating cash flow impact due to working
capital changes could be significant. As discussed above, we
have announced plans that we believe will provide adequate
liquidity through 2009. Beyond 2009, we believe that our ability
to meet our funding requirements primarily will depend on the
success of our North American Turnaround Plan and our ability to
successfully implement the initiatives that we announced in June
and July of 2008.
We manage our global liquidity centrally which allows us to
optimize funding of our global operations. At June 30,2008, approximately 46% of our reported liquidity was held in
the U.S. In the year to date period ended June 30, 2008,
our U.S. liquidity position deteriorated, partly due to the
impact of the strike at American Axle. However, our U.S.
operations have access to much of our overseas liquidity through
inter-company arrangements. A summary of our global liquidity is
as follows:
At June 30, 2008, the total VEBA trust assets and related
accounts were $15.0 billion, $0.5 billion of which was
readily available. At December 31, 2007, the total VEBA
trust assets were $16.3 billion, $0.6 billion of which
was readily-available. At June 30, 2007, the total VEBA
trust assets were $18.9 billion, $3.6 billion of which
was readily-available. The decrease in the total VEBA trust
assets since December 31, 2007 was due to negative asset
returns during the period and a withdrawal of VEBA
assets in the quarter ended June 30, 2008. In connection
with the Settlement Agreement a significant portion of the VEBA
assets have been allocated to the UAW Related Account which will
also hold the proportional investment returns on that percentage
of the trust. No amounts will be withdrawn from the UAW Related
Account including its investment returns from January 1,2008 until transfer to the New VEBA. This treatment has led us
to exclude any portion of the UAW Related Account from our
available liquidity at and subsequent to December 31, 2007.
Additionally, at the Final Settlement Date, which is expected to
be in 2010, we would be required to transfer $7.0 billion,
including deferred amounts discussed above, subject to
adjustment, to the New VEBA. Further at that time, we may either
transfer an additional $5.6 billion to the New VEBA,
subject to adjustment, or we may instead opt to make annual
payments of varying amounts between $0.4 billion and
$3.3 billion through 2020. At any time after the Final
Settlement Date we will have the option to prepay all remaining
payments.
Credit
Facilities
At June 30, 2008, we had $7.6 billion of unused credit
capacity, of which $5.0 billion was available in the U.S.,
$1.1 billion was available in other countries where we do
business and $1.5 billion was available in our joint
ventures. The components of our available credit and unused
credit capacity are discussed in the following paragraphs.
We have a $4.5 billion standby revolving credit facility
with a syndicate of banks, which terminates in July 2011. At
June 30, 2008, the availability under the revolving credit
facility was $4.4 billion. At June 30, 2008, there
were $10 million of letters of credit issued under the
credit facility, and no loans were 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 General Motors of
Canada Limited (GM Canada), certain facilities, property and
equipment of GM Canada and a pledge of 65% of the stock of the
holding company for our indirect subsidiary General Motors de
Mexico, S de R.L. de C.V. 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 $1.6 billion. In the event of work
stoppages that result in the loss of a certain level of
production, the secured facility would be temporarily reduced to
$3.5 billion. At June 30, 2008, no borrowings under
this facility were outstanding. Subsequently, as of
August 1, 2008 we borrowed $1.0 billion against this
facility leaving $3.4 billion currently available.
In August 2007, we entered into a revolving credit agreement
expiring in August 2009 that provides for borrowings of up to
$1.0 billion at June 30, 2008. This agreement provides
additional available liquidity that we could use for general
corporate purposes, including working capital needs. Under the
facility, borrowings are limited to an amount based on the value
of underlying collateral, which consists of residual interests
in trusts that own leased vehicles and issue asset-backed
securities collateralized by the vehicles and the associated
leases. The underlying collateral was previously owned by GMAC
and was transferred to us as part of the GMAC transaction in
November 2006. The underlying collateral is held by
bankruptcy-remote subsidiaries and pledged to a trustee for the
benefit of the lender. We consolidate the bankruptcy-remote
subsidiaries and trusts for financial reporting purposes. The
underlying collateral supported a borrowing base of
$1.3 billion and $1.0 billion at December 31,2007 and June 30, 2008, respectively. At June 30,2008, $0.9 billion was outstanding under this agreement
leaving $0.1 billion available.
We also have an additional $0.5 billion in U.S. undrawn
committed facilities, including certain off-balance sheet
securitization programs, with various maturities up to one year
and $1.0 billion in undrawn uncommitted lines of credit in
other countries where we do business.
In addition, our consolidated affiliates with non-GM minority
shareholders, primarily GM Daewoo, have a combined
$1.5 billion in undrawn committed facilities.
Cash
Flow
The decrease in available liquidity to $21.0 billion at
June 30, 2008 from $27.3 billion at December 31,2007 was primarily a result of negative operating cash flow
driven by reduced production in North America, including the
impact of the work stoppage at American Axle and higher levels
of capital expenditures.
Investments in marketable securities primarily consist of
purchases, sales, and maturities of highly-liquid corporate,
U.S. government, U.S. government agency and mortgage-backed debt
securities used for cash management purposes. Between
January 1, 2008 and June 30, 2008 we liquidated net
$1.0 billion of marketable securities.
In the year to date period ended June 30, 2008, Automotive
and Other had negative cash flow from continuing operations of
$3.0 billion on a net loss from continuing operations of
$13.5 billion. That result compares with positive cash flow
from continuing operations of $0.9 billion and net income
from continuing operations of $0.8 billion in the
corresponding period of 2007. Operating cash flow in the period
ended June 30, 2008 was unfavorably impacted primarily by
lower volumes and the resulting loss in North America.
Capital expenditures of $4.1 billion and $2.9 billion
were a significant use of investing cash in the year to date
periods ended June 30, 2008 and 2007, respectively. Capital
expenditures were primarily made for global product programs,
powertrain and tooling requirements.
Debt
Total debt, including capital leases, industrial revenue bond
obligations and borrowings from GMAC at June 30, 2008 was
$40.5 billion, of which $8.0 billion was classified as
short-term or current portion of long-term debt and
$32.5 billion was classified as long-term. At
December 31, 2007, total debt was $39.4 billion of
which $6.0 billion was short-term or current portion of
long-term debt and $33.4 billion was long-term. This
increase in total debt was primarily a result of changes in
foreign exchange rates which caused non-U. S. Dollar denominated
debt to increase, new borrowing under a revolving credit
facility and new overseas borrowing facilities.
At June 30, 2008 short-term borrowing and current portion
of long-term debt of $8.0 billion includes
$1.5 billion of debt issued by our subsidiaries and
consolidated affiliates and $2.6 billion of related party
debt, mainly dealer wholesale floor plan financing from GMAC. We
have various debt maturities other than current of
$1.0 billion in 2009, $0.4 billion in 2010,
$1.8 billion in 2011 and various debt maturities of
$29.3 billion thereafter.
Net
Debt
Net debt, calculated as cash, marketable securities and
$0.5 billion of readily-available assets of the VEBA trust,
($0.6 billion at December 31, 2007), less the
short-term borrowings and long-term debt, was $19.5 billion
at June 30, 2008, compared with $12.1 billion at
December 31, 2007.
Other
Liquidity Issues
We believe that it is possible that issues may arise under
various other financing arrangements from our 2006 restatement
of prior consolidated financial statements. These financing
arrangements consist principally of obligations in connection
with sale/leaseback transactions, derivative contracts, and
other lease obligations, including off-balance sheet
arrangements, and do not include our public debt indentures. In
the current period, we evaluated the effect under these
agreements of our restatements and out of period adjustments
identified in the current period, including our legal rights
with respect to any claims that could be asserted, such as our
ability to cure. Based on our review, we believe that, although
no assurances can be given as to the likelihood, nature or
amount of any claims that may be asserted, amounts at
June 30, 2008 subject to possible claims of acceleration,
termination or other remedies requiring payments by us are not
likely to exceed $1.9 billion, consisting primarily of
off-balance sheet arrangements. Moreover, we believe there may
be economic or other disincentives for third parties to raise
such claims to the extent they have them. Based on this review,
we reclassified $257 million of these obligations, at
December 31, 2006, from long-term debt to short-term debt.
At June 30, 2008 and December 31, 2007, the amount of
obligations reclassified from long-term debt to short-term debt
based on this review was $212 million. We believe we have
sufficient liquidity over the short-term and medium-term to
satisfy any claims related to these matters. To date, we have
not received any such claims and we do not anticipate receiving
any such claims.
On June 4, 2008, we, along with Cerberus ResCap Financing
LLC (Cerberus Fund) entered into a Participation Agreement
(Participation Agreement) with GMAC. The Participation Agreement
provides that we will fund up to $368 million in loans made
by GMAC to ResCap through a $3.5 billion secured loan
facility GMAC has provided to ResCap (ResCap Facility), and that
the Cerberus Fund will fund up to $382 million. The ResCap
Facility expires on May 1, 2010, and all funding pursuant
to the Participation Agreement is to be done on a pro-rata basis
between us and the Cerberus Fund.
We and the Cerberus Fund are required to fund our respective
portions of the Participation Agreement when the amount
outstanding pursuant to the ResCap Facility exceeds
$2.75 billion, unless a default event has occurred, in
which case we and the Cerberus Fund are required to fund our
respective maximum obligations. Amounts funded by us and the
Cerberus Fund pursuant to the Participation Agreement are
subordinate to GMAC’s interest in the ResCap Facility, and
all principal payments remitted by ResCap under the ResCap
Facility are applied to GMAC’s outstanding balance, until
such balance is zero. Principal payments remitted by ResCap
while GMAC’s outstanding balance is zero are applied on a
pro-rata basis to us and the Cerberus Fund.
The ResCap Facility is secured by various assets held by ResCap
and its subsidiaries, and we are entitled to receive interest at
LIBOR plus 2.75% for the amount we have funded pursuant to the
Participation Agreement. In addition, we and the Cerberus Fund
are also entitled to receive our pro-rata share of the 1.75%
interest on GMAC’s share of the total outstanding balance.
At June 30, 2008, ResCap had fully drawn down the maximum
amount pursuant to the ResCap Facility, and we had funded our
maximum obligation of $368 million.
Financing
and Insurance Operations
Prior to the consummation of the GMAC Transaction, GMAC paid a
dividend to us of lease-related assets, having a net book value
of $4.0 billion and related deferred tax liabilities of
$1.8 billion. This dividend resulted in the transfer to us
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. In August 2007 we entered into a secured
revolving credit arrangement of up to $1.3 billion that is
secured by the equity interest on these ten securitization
trusts. In connection with this credit facility, we contributed
these two bankruptcy remote subsidiaries into a third bankruptcy
remote subsidiary. We consolidate the bankruptcy-remote
subsidiaries and the ten trusts for financial reporting purposes.
At June 30, 2008, in connection with these
bankruptcy-remote subsidiaries we had vehicles subject to
operating leases of $3.8 billion compared to
$6.7 billion at December 31, 2007, other assets of
$1.3 billion compared to $1.4 billion at
December 31, 2007, outstanding secured debt of
$2.7 billion compared to $4.8 billion at
December 31, 2007 and equity of $2.5 billion compared
to $3.3 billion at December 31, 2007. The value of
vehicles subject to lease under these bankruptcy remote
subsidiaries at June 30, 2008 includes an impairment charge
of $0.1 billion as a result of lower vehicle residual
values given the recent deterioration in sport utility vehicle
and fullsize
pick-up
truck residual values.
The decrease in operating leases, secured debt and equity from
December 31, 2007 is the result of the termination of some
leases in the period ended June 30, 2008 and the repayment
of the related secured debt. The secured debt has recourse
solely to the leased vehicles and related assets. We continue to
be obligated to the bankruptcy-remote subsidiaries for residual
support payments on the leased vehicles in an amount estimated
to equal $0.8 billion at June 30, 2008 and
$0.9 billion at December 31, 2007, respectively.
However, neither the securitization investors nor the trusts
have any rights to the residual support payments. We expect the
operating leases and related securitization debt to gradually
amortize over the next one to two 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 we expect to realize from the leased vehicle
securitizations over the next one to two years will come from
three principal sources: (1) 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; (2) cash received upon and following termination of
a securitization to
the extent of remaining over collateralization; and
(3) return of the residual support payments owing from us
each month. In the year to date period ended June 30, 2008,
the total cash flows released to these two bankruptcy-remote
subsidiaries was $672 million. In aggregate, since the
consummation of the GMAC transaction, $1.6 billion have
been released from these subsidiaries.
Negative industry conditions in North America continue to
increase the risks and costs associated with vehicle lease
financing. The impairments and increases in residual support and
risk sharing accruals related to lease assets in the quarter
ended June 30, 2008 were the results of reduced
expectations of the cash flows from these lease arrangements.
We have already taken steps to reduce the percentage of our
business that is retail leasing, with emphasis on curtailing
high risk areas by reducing contracts with 24/27 month
lease terms by approximately 50% since 2006. GMAC, our largest
provider of lease financing for our vehicles, is implementing
other initiatives to reduce the risk in its lease portfolio,
such as exiting incentive based lease financing in Canada and
reducing its lease volume in the United States. We plan to
continue to offer leasing options, though likely more narrowly
targeted to certain products and segments. We are developing
incentive programs to encourage consumers to purchase versus
lease vehicles. Lease financing was used for approximately 18%
of retail sales in the year to date period ended June 30,2008.
Status
of Debt Ratings
Our fixed income securities are rated by four independent credit
rating agencies: Dominion Bond Rating Services (DBRS),
Moody’s Investor Service (Moody’s), Fitch Ratings
(Fitch), and Standard & Poor’s (S&P). The
ratings indicate the agencies’ assessment of a
company’s ability to pay interest, distributions,
dividends, and principal on these securities. Lower credit
ratings generally represent higher borrowing costs and reduced
access to capital markets for a company. Their ratings of us are
based on information provided by us as well as other sources.
The agencies consider a number of factors when determining a
rating including, but not limited to, cash flows, liquidity,
profitability, business position and risk profile, ability to
service debt, and the amount of debt as a component of total
capitalization.
DBRS, Moody’s, Fitch, and S&P currently rate our
credit at non-investment grade. The following table summarizes
our credit ratings as of August 1, 2008:
Rating Agency
Corporate
Secured
Senior Unsecured
Outlook
DBRS
B (high)
Not Rated
B
Review — Negative
Fitch
B−
BB−
CCC+
Negative
Moody’s
B3
Ba3
Caa1
Review — Possible Downgrade
S&P
B−
B+
B−
Negative
Rating actions taken by each of the credit rating agencies from
January 1, 2008 through August 1, 2008 are as follows:
DBRS: On June 20, 2008, DBRS affirmed our Corporate rating
at “B (High)” and Senior Unsecured rating at
“B” and placed the credit ratings “Under Review
with Negative Implications” from “Stable” trend.
Fitch: On June 25, 2008, Fitch downgraded our Corporate
rating to “B−” from “B” secured rating
to “BB−” from “BB”, Senior Unsecured
rating to “CCC+” from “B−” with
Negative outlook.
Moody’s: On April 25, 2008, Moody’s affirmed our
Corporate debt rating at “B3” and placed the credit
rating on Negative outlook from Stable outlook. On July 15,2008, Moody’s affirmed our Corporate debt rating at
“B3” and placed the credit rating Under Review for
Possible Downgrade from Negative outlook. Speculative Grade
Liquidity rating was lowered to “SGL-2” from
“SGL-1”.
S&P: On May 22, 2008, S&P affirmed our Corporate
rating at “B”, upgraded our Senior Unsecured rating to
“B” from “B−” as a result of extending
its recovery ratings to all speculative-grade unsecured debt
issues, and placed the credit ratings of Negative outlook from
Credit Watch with Negative Implications. On June 20, 2008
S&P affirmed our “B” Corporate rating and
“BB−” Secured rating and placed the credit
ratings on Credit Watch with Negative Implications from Negative
outlook. On July 31, 2008 S&P downgraded our Corporate
rating to “B−” from “B”, Senior
Secured rating to “B+” from “BB−”,
Senior Unsecured rating to “B−” from
“B” with Negative outlook.
While our non-investment grade ratings have increased our
borrowing costs and limited our access to unsecured debt
markets, we have mitigated these results by actions taken over
the past few years to focus on increased use of liquidity
sources other than institutional unsecured markets that are not
directly affected by ratings on unsecured debt, including
secured funding sources and conduit facilities. Further
reductions of our 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, we believe that
we will continue to have access to sufficient capital to meet
our ongoing funding needs over the short- and medium-term.
Notwithstanding the foregoing, we believe that our current
ratings situation and outlook increase the level of risk for
achieving our funding strategy as well as the importance of
successfully executing our plans to improve operating results.
Fair
Value Measurements
On January 1, 2008, we adopted SFAS No. 157,
which addresses aspects of the expanding application of fair
value accounting. Refer to Note 11 to the condensed
consolidated financial statements for additional information
regarding the adoption and effects of SFAS No. 157.
Fair
Value Measurements on a Recurring Basis
In connection with the adoption of SFAS No. 157, we
used Level 3, or significant unobservable inputs to measure
6.7% of the total assets that we measured at fair value, and
0.3% of the total liabilities that we measured at fair value.
Level 3 inputs are estimates that require significant
judgment and are therefore subject to change.
The more significant assets, with the related Level 3
inputs, are as follows:
•
Mortgage-backed securities — Level 3 inputs
utilized in the fair value measurement process include estimated
prepayment and default rates on the underlying portfolio which
are embedded in a proprietary discounted cash flow projection
model.
•
Corporate debt and other securities — Significant
components of this security category include structured
investment vehicles, which trade in a market with limited
liquidity. Level 3 inputs utilized in the fair value
measurement process include estimated recovery rates on the
underlying portfolio which are embedded in a proprietary
discounted cash flow projection model.
•
Commodity derivatives — Commodity derivatives include
purchase contracts from various suppliers that are gross settled
in the physical commodity. Level 3 inputs utilized in the
fair value measurement process include estimated projected
selling prices, quantities purchased and counterparty credit
ratings, which are then discounted to the expected cash flow.
We adopted SFAS No. 157 on January 1, 2008 and
had no transfers in or out of Level 3 in the quarter and
year to date period ended June 30, 2008.
In accordance with the provisions of APB No. 18, we review
the carrying values of our investments when events and
circumstances warrant. This review requires the comparison of
the fair values of our investments to their respective carrying
values. The fair value of our investments is determined based on
valuation techniques using the best information that is
available, and may include quoted market prices, market
comparables, and discounted cash flow projections. An impairment
loss would be recorded whenever a decline in fair value below
the carrying value is determined to be other than temporary.
At December 31, 2007 we disclosed that we did not believe
our investment in GMAC was impaired, however, there were many
economic factors which were unstable at that time. Such factors
included the instability of the global credit and mortgage
markets, deteriorating conditions in the residential and home
building markets, and credit downgrades of GMAC and ResCap. In
the quarter ended March 31, 2008, the instability in the
global credit and mortgage markets increased, and the
residential and home building markets continued to deteriorate.
Additionally, it was necessary for GMAC to continue to provide
funding and capital infusions to ResCap, and GMAC’s and
ResCap’s credit ratings were further downgraded.
As a result of these factors, we reevaluated our investment in
GMAC Common and Preferred Membership Interests for possible
impairment. Accordingly, our investment in GMAC Common
Membership Interests, with a pre-impairment carrying amount of
$6.7 billion at March 31, 2008, was written down to
its fair value of $5.4 billion at March 31, 2008,
after considering the impact of recording our share of
GMAC’s results for the quarter ended March 31, 2008.
The resulting impairment charge of $1.3 billion was
recorded in Equity in loss of GMAC LLC. Additionally, our
investment in GMAC Preferred Membership Interests, with a
pre-impairment carrying amount of $1.0 billion at
March 31, 2008, was written down to its fair value of
$902 million at March 31, 2008. The resulting
impairment charge of $142 million was recorded in
Automotive interest income and other non-operating income
(expense), net.
In the quarter ended June 30, 2008 a decline in consumer
demand for automobiles, particularly
pick-up
trucks and sport utility vehicles, negatively impacted
GMAC’s North American automotive business, including
impairment of the residual value of vehicles on operating
leases. The instability of the global credit and mortgage
markets continued in the quarter ended June 30, 2008, and
increased in Europe, which caused significant losses at ResCap.
As a result of these factors, we reevaluated our investment in
GMAC Common and Preferred Membership Interests for possible
impairment. Accordingly, our investment in GMAC Common
Membership Interests, with a pre-impairment carrying amount of
$4.2 billion at June 30, 2008, was written down to its
estimated fair value of $3.5 billion at June 30, 2008,
after considering the impact of recording our share of
GMAC’s results for the quarter ended June 30, 2008.
The resulting impairment charge of $726 million was
recorded in Equity in loss of GMAC LLC. Our investment in GMAC
Preferred Membership Interests, with a pre-impairment carrying
amount of $902 million at June 30, 2008, was written
down to its estimated fair value of $294 million at
June 30, 2008. The resulting impairment charge of
$608 million was recorded in Automotive interest income and
other non-operating income (expense), net.
Continued or decreased demand for automobiles and continued or
increased instability of the global credit and mortgage markets
could further negatively impact GMAC’s lines of businesses,
and result in future impairments of our investment in GMAC
Common and Preferred Membership Interests.
In order to determine the fair value of our investment in GMAC
Common Membership Interests, we first determined a fair value of
GMAC by applying various valuation techniques to its significant
business units, and then applied our 49% equity interest to the
resulting fair value. Our determination of the fair value of
GMAC encompassed applying valuation techniques, which included
Level 3 inputs, to GMAC’s significant business units
as follows:
•
Auto Finance — We obtained industry data, such as
equity and earnings ratios for other industry participants, and
developed average multiples for these companies based upon a
comparison of their businesses to Auto Finance.
•
Insurance — We developed a peer group, based upon such
factors as equity and earnings ratios and developed average
multiples for these companies.
•
Residential Capital, LLC — We obtained industry data
for an industry participant who we believe to be comparable, and
also utilized the implied valuation based on an acquisition of
an industry participant who we believe to be comparable.
•
Commercial Finance Group — We obtained industry data,
such as price and earnings ratios, for other industry
participants, and developed average multiples for these
companies based upon a comparison of their businesses to the
Commercial Finance Group.
In order to determine the fair value of our investment in GMAC
Preferred Membership Interests, we determined a fair value by
applying valuation techniques, which included Level 3
inputs, to various characteristics of the GMAC Preferred
Membership Interests as follows:
•
Utilizing information as to the pricing on similar investments
and changes in yields of other GMAC securities, we developed a
discount rate for the valuation.
•
Utilizing assumptions as to the receipt of dividends on the GMAC
Preferred Membership Interests, the expected call date and a
discounted cash flow model, we developed a present value of the
related cash flows.
At June 30, 2008 we adjusted our assumptions as to the
appropriate discount rate to utilize in the valuation due to the
changes in the market conditions which occurred in the quarter
ended June 30, 2008. Additionally, we adjusted our
assumptions as to the likelihood of payments of dividends and
call date of the Preferred Membership Interests.
Off-Balance
Sheet Arrangements
We use off-balance sheet arrangements where the economics and
sound business principles warrant their use. Our principal use
of off-balance sheet arrangements occurs in connection with the
securitization and sale of financial assets.
The financial assets we sold consist principally of trade
receivables that are part of a securitization program in which
we have participated since 2004. As part of this program, we
sell receivables to a wholly-owned bankruptcy remote special
purpose entity (SPE). The SPE is a separate legal entity that
assumes the risks and rewards of ownership of those receivables.
In September 2007, we renewed an agreement to sell undivided
interests in eligible trade receivables up to $600 million
directly to banks and to a bank conduit which funds its
purchases through issuance of commercial paper. Receivables sold
under the program are sold at fair market value and are excluded
from our condensed consolidated balance sheets. The loss on
trade receivables sold is included in Automotive cost of sales
and was $1.0 million and $2.3 million for the year to
date period ended June 30, 2008 and 2007, respectively. The
banks and the bank conduits had a beneficial interest in the
eligible pool of receivables of $375 million, $0, and
$25 million at June 30, 2008, December 31, 2007
and June 30, 2007, respectively. We do not have a retained
interest in the receivables sold, but perform collection and
administrative functions. The gross amount of proceeds received
from the sale of receivables under this program was
$0.6 billion for each of the year to date periods ended
June 30, 2008 and 2007.
In addition to this securitization program, we participate in
other trade receivable securitization programs in Europe. Some
of our direct or indirect subsidiaries have entered into
factoring agreements to sell certain trade receivables to banks
and to factoring companies. Limits are based on contractually
agreed upon amounts
and/or on
the entities’ balance of participating trade receivables.
In 2008 the average facility limits for the participating
entities were $88 million in total. The banks and factoring
companies had a beneficial interest of $5 million,
$26 million, and $11 million in the participating pool
of trade receivables at June 30, 2008, December 31,2007 and June 30, 2007, respectively.
We lease real estate and equipment from various off-balance
sheet entities that have been established to facilitate the
financing of those assets for us by nationally prominent lessors
that we believe are creditworthy. These assets consist
principally of office buildings 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 us.
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, us. We believe that no officers, directors or
employees of ours or our affiliates hold any direct or indirect
equity interests in such entities.
Assets in off-balance sheet entities are as follows:
On July 14, 2008, our Board of Directors voted to suspend
dividends on our common stock indefinitely.
Dividends may be paid on our common stock when, as, and if
declared by our 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.
Our policy is to distribute dividends on our common stock based
on the outlook and indicated capital needs of the business. Cash
dividends per share on common stock were $0.25 for the quarter
ended June 30, 2008, $0.50 for the year to date period
ended June 30, 2008 and $1.00 in 2007 ($0.25 per quarter).
At the February 5, 2008 and May 6, 2008 meetings of
our Board of Directors, the Board approved the payment of a
$0.25 quarterly dividend on common stock during the quarters
ended March 31, 2008 and June 30, 2008, respectively.
Includes approximately 3,100 employees of Allison Transmission
at June 30, 2007.
(b)
Of the approximately 18,700 employees who have elected to
participate in the 2008 Special Attrition Programs at
June 30, 2008, 7,100 have left active employment prior to
July 1, 2008, and 11,600 who have left active employment on
or after July 1, 2008.
Critical
Accounting Estimates
Our condensed consolidated financial statements are prepared in
conformity with United States generally accepted accounting
principles, which requires the use of estimates, judgments and
assumptions that affect the reported assets and liabilities at
the financial statement dates and the reported revenues and
expenses for the periods presented. Our significant accounting
policies and critical accounting estimates are consistent with
those described in Note 2 to the consolidated financial
statements and the MD&A section in our 2007
10-K, and
are included in our 2007 10-K in their entirety. There were no
significant changes in our application of our critical
accounting policies in the period ended June 30, 2008 with
the exception that we adopted the provisions of
SFAS No. 157, as further described in Note 11 to
the condensed consolidated financial statements, and the changes
discussed below regarding deferred taxes, the valuation of cost
and equity method investments and the valuation of vehicle
operating leases and lease residuals. We believe the accounting
policies related to our defined benefit pension and other
postretirement benefits plans, sales incentives, deferred taxes,
provision for policy, warranty and recalls, impairment of
long-lived assets, derivatives and valuation of vehicle
operating lease and lease residuals are most critical to aid in
fully understanding and evaluating our reported financial
condition and results of operations.
We believe 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. We
have discussed the development, selection and disclosures of our
critical accounting estimates with the Audit Committee of our
Board of Directors, and the Audit Committee has reviewed the
disclosures relating to these estimates.
Deferred
Taxes
Pursuant to SFAS No. 109, “Accounting for Income
Taxes” (SFAS No. 109), valuation allowances have been
established for deferred tax assets based on a “more likely
than not” threshold. Our ability to realize our deferred
tax assets depends on our ability to generate sufficient taxable
income within the carryback or carryforward periods provided for
in the tax law for each applicable tax jurisdiction. We have
considered the following possible sources of taxable income when
assessing the realization of our deferred tax assets:
•
Future reversals of existing taxable temporary differences;
•
Future taxable income exclusive of reversing temporary
differences and carryforwards;
•
Taxable income in prior carryback years; and
•
Tax-planning strategies.
Pursuant to SFAS No. 109, concluding that a valuation
allowance is not required is difficult when there is significant
negative evidence which is objective and verifiable, such as
cumulative losses in recent years. We utilize a rolling three
years of actual and
current year anticipated results as our primary measure of our
cumulative losses in recent years. However, because a
substantial portion of those cumulative losses related to
various non-recurring matters and the implementation of our
North American Turnaround Plan, we adjusted those three-year
cumulative results for the effect of these items. The analysis
performed in the quarters ended September 30, 2007 and
March 31, 2008 indicated that in the United States, Canada,
Germany and the United Kingdom, we have cumulative three-year
losses on an adjusted basis. In Spain, we anticipate being in a
cumulative three-year loss position in the near-term. This is
considered significant negative evidence which is objective and
verifiable and therefore, difficult to overcome. In addition, as
discussed in “Near-Term Market Challenges” our
near-term financial outlook in these jurisdictions has
deteriorated. Accordingly, in the quarter ended
September 30, 2007, we concluded that the objectively
verifiable negative evidence of our recent historical losses
combined with our challenging near-term outlook out-weighed
other factors and that it was more likely than not that we will
not generate taxable income to realize our net deferred tax
assets, in whole or in part in the United States, Canada, and
Germany. Our three-year adjusted cumulative loss in the United
States at June 30, 2008 has increased from that at
December 31, 2007; therefore we continue to believe this
conclusion is appropriate. As it relates to our assessment in
the United States, many factors in our evaluation are not within
our control, particularly:
•
The possibility for continued or increasing price competition in
the highly competitive U.S. market;
•
Continued high fuel prices and the effect that may have on
consumer preferences related to our most profitable products,
fullsize
pick-up
trucks and sport utility vehicles;
•
Uncertainty over the effect on our cost structure from more
stringent U.S. fuel economy and global emissions standards which
may require us to sell a significant volume of alternative fuel
vehicles across our portfolio;
•
Uncertainty as to the future operating results of GMAC; and
•
Acceleration of tax deductions for OPEB liabilities as compared
to prior expectations due to changes associated with the
Settlement Agreement.
We recorded full valuation allowances against our net deferred
tax assets in the United States, Canada and Germany in the
quarter ended September 30, 2007 and in Spain and the
United Kingdom in the quarter ended March 31, 2008. With
regard to the United States, Canada, Germany, Spain and the
United Kingdom, we continue to believe that full valuation
allowances are needed against our net deferred tax assets in
these tax jurisdictions. The factors leading to our decision to
record full valuation allowances against our net deferred tax
assets in the United Kingdom and Spain are discussed in
Corporate and Other operations in this MD&A.
If, in the future, we generate taxable income in the United
States, Canada, Germany, the United Kingdom and Spain on a
sustained basis, our conclusion regarding the need for full
valuation allowances in these tax jurisdictions could change in
the future, resulting in the reversal of some or all of the
valuation allowances. If our U.S., Canadian, German, United
Kingdom, or Spanish operations generate taxable income prior to
reaching profitability on a sustained basis, we would reverse a
portion of the valuation allowance related to the corresponding
realized tax benefit for that period, without changing our
conclusions on the need for a full valuation allowance against
the remaining net deferred tax assets.
Valuation
of Cost and Equity Method Investments
Equity investees accounted for under the cost or equity method
of accounting are evaluated for impairment in accordance with
Accounting Principles Board Opinion No. 18, “The
Equity Method of Accounting for Investments in Common
Stock.” An impairment loss would be recorded whenever a
decline in value of an equity investment below its carrying
amount is determined to be other than temporary. In determining
if a decline is other than temporary we consider such factors as
the length of time and extent to which the fair value of the
investment has been less than the carrying amount of the equity
affiliate, the near-term and longer-term operating and financial
prospects of the affiliate and our intent and ability to hold
the investment for a period of time sufficient to allow for any
anticipated recovery.
When available, we use quoted market prices to determine fair
value. If quoted market prices are not available, fair value is
based upon valuation techniques that use, where possible,
market-based inputs. Generally, fair value is estimated using a
combination of the income approach and the market approach.
Under the income approach, estimated future cash flows are
discounted at a rate commensurate with the risk involved using
marketplace assumptions. Under the market approach, valuations
are based on actual comparable market transactions and market
earnings and book value multiples for comparable entities. The
assumptions used in the income and market approaches have a
significant effect on the determination of fair value.
Significant assumptions include estimated future cash flows,
appropriate discount rates, and adjustments to market
transactions
and market multiples for differences between the market data and
the equity affiliate being valued. Changes to these assumptions
could have a significant effect on the valuation of our equity
affiliates.
Valuation
of Vehicle Operating Leases and Lease Residuals
In accounting for vehicle operating leases, we must make a
determination at the beginning of the lease of the estimated
realizable value (i.e., residual value) of the vehicle at the
end of the lease. Residual value represents an estimate of the
market value of the vehicle at the end of the lease term, which
typically ranges from nine months to four years. The customer is
obligated to make payments during the term of the lease to the
contract residual. However, since the customer is not obligated
to purchase the vehicle at the end of the contract, we are
exposed to a risk of loss to the extent the value of the vehicle
is below the residual value estimated at contract inception.
Residual values are initially determined by consulting
independently published residual value guides. Realization of
the residual values is dependent on our future ability to market
the vehicles under the prevailing market conditions. Over the
life of the lease, we evaluate the adequacy of our estimate of
the residual value and may make adjustments to the extent the
expected value of the vehicle at lease termination declines. The
adjustment may be in the form of revisions to the depreciation
rate or recognition of an impairment loss. Impairment is
determined to exist if the undiscounted expected future cash
flows are lower than the carrying value of the asset.
Additionally, for operating leases arising from vehicles sold to
dealers, an adjustment may also be made to the estimate of
marketing incentive accruals for residual support and risk
sharing programs initially recognized when vehicles are sold to
dealers. When a lease vehicle is returned to us, the asset is
reclassified from Equipment on operating leases, net to
Inventory at the lower of cost or estimated fair value, less
costs to sell.
During the quarter and year to date period ended June 30,2008, we increased our accrual for residual support and risk
sharing by $1.6 billion and recognized an impairment of
$0.1 billion.
Our depreciation methodology related to Equipment on operating
leases, net considers management’s expectation of the value
of the vehicles upon lease termination, which is based on
numerous assumptions and factors influencing used automotive
vehicle values. The critical assumptions underlying the
estimated carrying value of automotive lease assets include:
(1) estimated market value information obtained and used by
management in estimating residual values; (2) proper
identification and estimation of business conditions;
(3) our remarketing abilities; and (4) our vehicle and
marketing programs. Changes in these assumptions could have a
significant impact on the value of the lease residuals.
Accounting
Standards Not Yet Adopted
Business
Combinations
In December 2007 the Financial Accounting Standards Board (FASB)
issued SFAS No. 141(R), “Business
Combinations” (SFAS No. 141(R)), which retained
the underlying concepts under existing standards in that all
business combinations are still required to be accounted for at
fair value under the acquisition method of accounting but
SFAS No. 141(R) changed the method of applying the
acquisition method in a number of significant aspects.
SFAS No. 141(R) will require that: (1) for all
business combinations, the acquirer records all assets and
liabilities of the acquired business, including goodwill,
generally at their fair values; (2) certain pre-acquisition
contingent assets and liabilities acquired be recognized at
their fair values on the acquisition date; (3) contingent
consideration be recognized at its fair value on the acquisition
date and, for certain arrangements, changes in fair value will
be recognized in earnings until settled;
(4) acquisition-related transaction and restructuring costs
be expensed rather than treated as part of the cost of the
acquisition and included in the amount recorded for assets
acquired; (5) in step acquisitions, previous equity
interests in an acquiree held prior to obtaining control be
re-measured to their acquisition-date fair values, with any gain
or loss recognized in earnings; and (6) when making
adjustments to finalize initial accounting, companies revise any
previously issued post-acquisition financial information in
future financial statements to reflect any adjustments as if
they had been recorded on the acquisition date.
SFAS No. 141(R) is effective on a prospective basis
for all business combinations for which the acquisition date is
on or after the beginning of the first annual period subsequent
to December 15, 2008, with the exception of the accounting
for valuation allowances on deferred taxes and acquired tax
contingencies. SFAS No. 141(R) amends
SFAS No. 109 such that adjustments made to valuation
allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective
date of this statement should also apply the provisions of
SFAS No. 141(R). Once effective, this standard will be
applied to all future business combinations.
Noncontrolling
Interests in Consolidated Financial Statements
In December 2007 the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB 51”
(SFAS No. 160), which amends Accounting Research
Bulletin (ARB) No. 51 “Consolidated Financial
Statements” (ARB No. 51) to establish new
standards that will govern the accounting for and reporting of
noncontrolling interests in partially owned consolidated
subsidiaries and the loss of control of subsidiaries. Also,
SFAS No. 160 requires that: (1) noncontrolling
interest, previously referred to as minority interest, be
reported as part of equity in the consolidated financial
statements; (2) losses be allocated to the noncontrolling
interest even when such allocation might result in a deficit
balance, reducing the losses attributed to the controlling
interest; (3) changes in ownership interests be treated as
equity transactions if control is maintained; (4) upon a
loss of control, any gain or loss on the interest sold be
recognized in earnings; and (5) the noncontrolling
interest’s share be recorded at the fair value of net
assets acquired, plus its share of goodwill.
SFAS No. 160 is effective on a prospective basis for
all fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, except for the
presentation and disclosure requirements, which will be applied
retrospectively. We are currently evaluating the effects that
SFAS No. 160 will have on our financial condition and
results of operations.
Disclosures
about Derivative Instruments and Hedging Activities —
an Amendment of FASB Statement No. 133
In March 2008 the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities — an Amendment of FASB Statement
No. 133” (SFAS No. 161), that expands the
disclosure requirements of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities” (SFAS No. 133).
SFAS No. 161 requires additional disclosures
regarding: (1) how and why an entity uses derivative
instruments; (2) how derivative instruments and related
hedged items are accounted for under SFAS No. 133; and
(3) how derivative instruments and related hedged items
affect an entity’s financial position, financial
performance, and cash flows. In addition, SFAS No. 161
requires qualitative disclosures about objectives and strategies
for using derivatives described in the context of an
entity’s risk exposures, quantitative disclosures about the
location and fair value of derivative instruments and associated
gains and losses, and disclosures about credit-risk-related
contingent features in derivative instruments.
SFAS No. 161 is effective for fiscal years and interim
periods within these fiscal years, beginning after
November 15, 2008.
Accounting
for Convertible Debt Instruments
In May 2008 the FASB ratified FASB Staff Position (FSP)
No. APB
14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (Including Partial Cash
Settlement)” (FSP No. APB
14-1), which
requires issuers of convertible debt securities within its scope
to separate these securities into a debt component and into an
equity component, resulting in the debt component being recorded
at fair value without consideration given to the conversion
feature. Issuance costs are also allocated between the debt and
equity components. FSP No. APB
14-1 will
require that convertible debt within its scope reflect an
entity’s nonconvertible debt borrowing rate when interest
expense is recognized. FSP No. APB
14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years, and shall be applied retrospectively
to all prior periods. We estimate that upon adoption, interest
expense will increase for all periods presented with fiscal year
2009 pre-tax interest expense increasing by approximately
$125 million based on our current level of indebtedness.
Participating
Share-Based Payment Awards
In June 2008 the FASB ratified FSP
No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities” (FSP
No. EITF
03-6-1),
which addresses whether instruments granted in share-based
payment awards are participating securities prior to vesting
and, therefore, must be included in the earnings allocation in
calculating earnings per share under the two-class method
described in SFAS No. 128, “Earnings per
Share” (SFAS No. 128). FSP No. EITF
03-6-1
requires that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend-equivalents be
treated as participating securities in calculating earnings per
share. FSP No. EITF
03-6-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years, and
shall be applied retrospectively to all prior periods. We are
currently evaluating the effects, if any that FSP No. EITF
03-6-1 may
have on earnings per share.
Determination
of Whether an Equity-Linked Financial Instrument (or Embedded
Feature) is Indexed to an Entity’s Own Stock
In June 2008 the FASB ratified EITF
No. 07-5,
“Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (EITF
No. 07-5),
which requires that an instrument’s contingent exercise
provisions are analyzed first based upon EITF
No. 01-6,
“The Meaning of ’Indexed to a Company’s Own
Stock’ “ (EITF
No. 01-6).
If this evaluation does not preclude consideration of an
instrument as indexed to its own stock, the instrument’s
settlement provisions are then analyzed. An instrument is
considered indexed to an entity’s own stock if its
settlement amount will equal the difference between the fair
value of a fixed number of the entity’s equity shares and a
fixed amount of cash or another financial asset. EITF
No. 07-5
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years, with recognition of a cumulative
effect of change in accounting principle for all instruments
existing at the effective date to the balance of retained
earnings. We are currently evaluating the effects, if any, that
EITF
No. 07-5
may have on our financial condition and results of operations.
Accounting
for Collaborative Arrangements
In December 2007 the FASB ratified EITF
No. 07-1,
“Accounting for Collaborative Arrangements” (EITF
No. 07-1),
which requires revenue generated and costs incurred by the
parties in the collaborative arrangement be reported in the
appropriate line in each company’s financial statements
pursuant to the guidance in EITF
No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an
Agent” (EITF
No. 99-19)
and not account for such arrangements using the equity method of
accounting. EITF
No. 07-1
also includes enhanced disclosure requirements regarding the
nature and purpose of the arrangement, rights and obligations
under the arrangement, accounting policy, and the amount and
income statement classification of collaboration transactions
between the parties. EITF
No. 07-1
is effective for fiscal years beginning after December 15,2008, and interim periods within those fiscal years, and shall
be applied retrospectively (if practicable) to all prior periods
presented for all collaborative arrangements existing as of the
effective date. We are currently evaluating the effects, if any,
that EITF
No. 07-1
may have on the presentation and classification of these
activities in our financial statements.
Accounting,
by Lessees, for Nonrefundable Maintenance Deposits
In June 2008 the FASB ratified EITF
No. 08-3,
“Accounting by Lessees for Nonrefundable Maintenance
Deposits” (EITF
No. 08-3),
which specifies that nonrefundable maintenance deposits that are
contractually and substantively related to maintenance of leased
assets are to be accounted for as deposit assets. EITF
No. 08-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, with recognition of a
cumulative effect of change in accounting principle to the
opening balance of retained earnings for the first year
presented. We are currently evaluating the effects, if any, that
EITF
No. 08-3
may have on our financial condition and results of operations.
Forward-Looking
Statements
In this report and in reports we subsequently file with the SEC
on
Forms 10-K
and 10-Q and
file or furnish on
Form 8-K,
and in related comments by our management, our use of the words
“expect,”“anticipate,”“estimate,”“forecast,”“initiative,”“objective,”“plan,”“goal,”“project,”“outlook,”“priorities,”“target,”“intend,”“when,”“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 we may file with the SEC on
Forms 10-K
and 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 our 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:
•
Our ability 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 and development of technology
associated with the products;
•
Shortages of and price increases for fuel;
•
Market acceptance of our new products including cars and
crossovers;
•
Significant changes in the competitive environment and the
effect of competition in our markets, including on our 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;
•
Changes in the ability of GMAC to make distributions on the
Preferred Membership Interests we hold;
•
Changes in accounting principles, or their application or
interpretation, and our ability to make estimates and the
assumptions underlying the estimates, including the estimates
for the Delphi pension benefit guarantees, which could result in
an impact on earnings;
•
Negotiations and bankruptcy court actions with respect to
Delphi’s obligations to us and our obligations to Delphi,
negotiations with respect to our obligations under the benefit
guarantees to Delphi employees and our ability to recover any
indemnity claims against Delphi;
•
Labor strikes or work stoppages at our facilities or our key
suppliers such as Delphi or financial difficulties at our key
suppliers such as Delphi;
•
Additional credit rating downgrades and the effects thereof;
•
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 new
collective bargaining agreements with unions representing our
employees in the United States other than the UAW;
•
Completion of the final settlement with the UAW and UAW
retirees, including obtaining court approval in a form
acceptable to us, the UAW, and class counsel; treatment of the
terms of the 2007 National Agreement pursuant to the Settlement
Agreement in a form acceptable to us, the UAW and class counsel;
our completion of discussions with the staff of the SEC
regarding accounting treatment with respect to the New VEBA and
the Post-Retirement Medical Benefits for the Covered Group as
set forth in the Settlement Agreement, on a basis reasonably
satisfactory to us; and as applicable, a determination by us
that the New VEBA satisfies the requirements of
section 302(c)(5) of the Labor-Management Relations Act of
1947, as amended, as well as bank and other regulatory approval;
and
•
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. The
factors identified by GMAC include, among others, the following:
•
Rating agencies may downgrade their ratings for GMAC or ResCap
in the future, which would adversely affect GMAC’s ability
to raise capital in the debt markets at attractive rates and
increase the interest that it pays on its outstanding publicly
traded notes, which could have a material adverse effect on its
results of operations and financial condition;
•
GMAC’s business requires substantial capital, and if it is
unable to maintain adequate financing sources, its profitability
and financial condition will suffer and jeopardize its ability
to continue operations;
•
The profitability and financial condition of its operations are
dependent upon our operations, and it has substantial credit
exposure to us;
•
Recent developments in the residential mortgage market,
especially in the nonprime sector, may adversely affect
GMAC’s revenues, profitability and financial condition;
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, its margins could be materially
adversely affected.
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
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 our exposure to market
risk since December 31, 2007. Refer to Item 7A in our
2007 10-K.
* * * * * *
Item 4.
Controls
and Procedures
Disclosure
Controls and Procedures
We maintain 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 our management, including our principal
executive officer, principal operating officer and principal
financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Our management, with the participation of our Chairman and Chief
Executive Officer (CEO) and our Executive Vice President 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), at
June 30, 2008. Based on that evaluation, our CEO and CFO
concluded that, at that date, our disclosure controls and
procedures required by paragraph (b) of Exchange Act
Rules 13a-15
or 15d-15 were not effective at a 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. The
effect of such weaknesses on our disclosure controls and
procedures, as well as remediation actions taken and planned,
are described in Item 9A, Controls and Procedures, of our
Annual Report on
Form 10-K
for the year ended December 31, 2007.
Remediation
and Changes in Internal Controls
We developed and are in the process of implementing remediation
plans to address our material weaknesses. In the quarter ended
June 30, 2008, the following specific remedial actions have
been put in place:
•
Hired a new Director of Internal Controls and SOX Compliance to
lead our remediation efforts and improve our internal control
over financial reporting.
•
Named a new Assistant Controller of Corporate Financial
Processes and Assurance responsible for Controller’s Change
Risk Management.
The following progress related to the remediation of the
Employee Benefits material weakness has been made:
•
Engaged additional external resources to support and assist with
the remediation activities.
•
Began the implementation of global processes to improve the
methods by which we gather and analyze accounting information.
We have implemented the following remedial actions for the
Income Tax Accounting material weakness:
•
Began implementation of a project plan using internal and
external resources to re-design and strengthen our tax
accounting process.
•
Enhanced several key processes critical to remediating the tax
accounting material weakness, including implementing monitoring
controls, enhanced reconciliation activities and improved data
collection.
•
Enhanced our Corporate and global tax staff by deploying more
than 50 additional consulting resources.
The following progress related to the remediation of the period
end financial reporting process material weakness has been made:
•
Account reconciliation process significantly improved.
•
Additional regional reporting and analytical requirements
developed.
•
New consolidation system developed and readied for
implementation.
As outlined in Note 17 to the condensed consolidated
financial statements, certain adjustments have been reflected in
the condensed consolidated financial statements which primarily
relate to GMAP. These issues were identified as a result of
extended training conducted as part of the remediation efforts
related to derivatives and hedging and to improve our overall
internal control over financial reporting. Management has
evaluated the circumstances resulting in these adjustments and
believes that the root cause is the failure to analyze and
monitor the appropriate factors for hedge accounting, which
include, but are not limited to, monitoring changes to
forecasted results in determining whether the Corporation could
continue to meet the requirements to apply hedge accounting on
existing hedging positions, including the recording of any
adjustments in a timely manner. As discussed in our Annual
Report on
Form 10-K
for the years ended December 31, 2006 and December 31,2007, management concluded that controls over the period end
financial reporting process were not operating effectively and
that ongoing remediation is necessary to ensure that the
following processes are implemented: (1) improved analysis;
(2) continued review of complex accounting estimates and
transactions; (3) integration of personnel with appropriate
technical expertise into the close process; and
(4) improved monitoring controls at Corporate Accounting
and business units. Management believes that the errors noted in
the current quarter will be adequately addressed by these
on-going remediation activities.
As previously noted, we augmented the resources in Corporate
Accounting, the Tax Department and other key departments by
utilizing approximately 259 external resources and implemented
additional closing procedures in 2008. As a result, we believe
that there are no material inaccuracies or omissions of material
fact and, to the best of our knowledge, believe that the
condensed consolidated financial statements at and for the
quarter and year to date period ended June 30, 2008, fairly
present in all material respects our financial condition and
results of operations in conformity with accounting principles
generally accepted in the United States of America.
Other than as described above, there have not been any other
changes in our internal control over financial reporting in the
quarter and year to date period ended June 30, 2008, which
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Limitations
on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that
our disclosure controls or our internal control over financial
reporting will prevent or detect all errors and all fraud. A
control system cannot provide absolute assurance due to its
inherent limitations; it is a process that involves human
diligence and compliance and is subject to lapses in judgment
and breakdowns resulting from human failures. A control system
also can be circumvented by collusion or improper management
override. 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 such limitations, disclosure controls and internal control
over financial reporting cannot prevent or detect all
misstatements, whether unintentional errors or fraud. However,
these inherent limitations are known features of the financial
reporting process, therefore, it is possible to design into the
process safeguards to
In the previously reported antitrust class action consolidated
in the U.S. District Court for the District of Maine, In re
New Market Vehicle Canadian Export Antitrust Litigation
Cases, the U.S. Court of Appeals for the First Circuit
reversed the certification of the injunctive class and ordered
dismissal of the injunctive claim on March 28, 2008. The
U.S. Court of Appeals for the First Circuit also vacated the
certification of the damages class and remanded to the U.S.
District Court for the District of Maine for determination of
several issues concerning federal jurisdiction and, if such
jurisdiction still exists, for reconsideration of that class
certification on a more complete record. The parties are now
briefing for the District Court the defendants’ various
motions for summary judgment and motions in limine, as well as
plaintiffs’ renewed motion for class certification.
* * * * * * *
Health
Care Litigation — 2007 Agreement
In the previously reported class lawsuit brought in the U.S.
District Court for the Eastern District of Michigan by the UAW
and eight putative class representatives, UAW, et al. v.
General Motors Corporation, we completed settlement
negotiations and entered into the Settlement Agreement with the
UAW and the putative classes on February 21, 2008. The
Court certified the class and granted preliminary approval of
the Settlement Agreement on March 4, 2008. Notice of the
settlement was mailed to 520,000 class members, and the final
hearing to review the fairness of the Settlement Agreement was
held on June 3, 2008. On July 31, 2008, the Court
approved the Settlement Agreement. All appeals, if any, are
expected to be exhausted no later than January 1, 2010.
* * * * * * *
GM
Securities and Shareholder Derivative Suits
In the previously reported case, In re General Motors
Corporation Securities and Derivative Litigation, the
parties reached an agreement in principle to settle the GM
Securities litigation on July 21, 2008. The settlement is
subject to the negotiation of a formal agreement, which will be
filed with the court in late August or early September 2008. The
agreement in principle calls for us to pay $277 million. We
will be required to pay one-half of the money into an escrow
account within 30 days of preliminary approval of the
settlement by the court, and the other half into an escrow
account in January 2009. The tentative settlement is subject to
court approval.
With regard to the shareholder derivative suits pending in the
United States District Court for the Eastern District of
Michigan, the parties reached an agreement in principle to
settle the suits on August 6, 2008. The settlement is
subject to the negotiation of a formal agreement, which will be
filed with the court. The agreement in principle requires our
management to recommend to the Board of Directors and its
committees that we implement and maintain certain corporate
governance changes for a period of four years. We will also pay
plaintiffs’ attorneys’ fees and costs as approved by
the court. We have agreed not to oppose an application for
attorneys’ fees and costs by the derivative plaintiffs in
an amount not to exceed $7.465 million. The tentative
settlement is subject to court approval.
In the previously reported case, Salisbury v. Barnevik, et
al., brought in the Circuit Court of Wayne County, Michigan,
the Court has continued the stay in the proceedings until August
2008. As a condition of the tentative settlement in the
shareholder derivative suits pending in the United States
District Court for the Eastern District of Michigan, the
shareholder derivative cases pending in Wayne County Circuit
Court will be dismissed with prejudice.
* * * * * * *
GMAC
Bondholder Class Actions
With respect to the previously reported litigation consolidated
under the caption Zielezienski, et al. v. General Motors
Corporation, et al., on March 6, 2008, the U.S. Court
of Appeals for the Sixth Circuit affirmed the dismissal of this
case by the U.S. District Court for the Eastern District of
Michigan. Plaintiffs filed a motion for rehearing. On
June 26, 2008, the U.S. Court of Appeals for the Sixth
Circuit entered an order granting plaintiffs’ motion for
rehearing, but reaffirming the dismissal of plaintiffs’
complaint. Plaintiffs have filed a petition for rehearing en
banc.
* * * * * * *
ERISA
Class Actions
In connection with the previously reported case In re General
Motors ERISA Litigation, the United States District Court
for the Eastern District of Michigan gave final approval to the
proposed settlement on June 5, 2008. In July 2008, one of
the objectors to plaintiffs’ attorneys’ fees award
filed an appeal with the United States Court of Appeals for the
Sixth Circuit.
In connection with the previously reported cases of Young, et
al. v. General Motors Investment Management Corporation, et
al. and Mary M. Brewer, et al. v. General Motors
Investment Management Corporation, et al., on March 24,2008 the U.S. District Court for the Southern District of
New York granted our motions to dismiss both of these cases on
statute of limitations grounds. Plaintiffs have appealed the
dismissal in both cases.
* * * * * * *
Patent
and Trade Secrets Litigation
In connection with the previously reported case John Evans
and Evans Cooling Systems, Inc. v. General Motors
Corporation, the case is currently set for trial in March
2009. Plaintiffs have indicated their intent to seek damages in
excess of $600 million at trial. As previously reported,
plaintiffs are expected to appeal a ruling by the trial court
which substantially restricted the scope of damages available to
them (plaintiffs previously sought relief in excess of
$12 billion) following the trial.
* * * * * * *
Coolant
System Class Action Litigation
With respect to this previously reported subject of litigation,
in October 2007 the parties reached a tentative settlement that
would resolve certain claims in the putative class actions
related to alleged defects in the engine cooling systems in our
vehicles. This settlement has been documented in formal written
agreements, which have been preliminarily approved by the state
courts in California (covering claims in 49 states) and
Missouri. If finally approved, the settlement as negotiated will
resolve claims related to vehicles sold in the U.S. with a 3.1,
3.4 or 3.8-liter engine or to the use of DexCool engine coolant
in sport utility vehicles and
pick-up
trucks with a 4.3-liter engine from 1996 through 2000. Hearings
to consider final approval of the settlement have been scheduled
for August 29, 2008 in California and September 5,2008 in Missouri. The settlement does not include claims
asserted in several different alleged class actions related to
alleged gasket failures in certain other engines, including 4.3,
5.0 and 5.7-liter engines (without model year restrictions), or
claims relating to alleged coolant related failures in vehicles
other than those listed above. Such claims are to be dismissed
without prejudice.
The Corporation has been named in four class action lawsuits
alleging that certain 1998 through 2004 C/K
pick-up
trucks have defective parking brakes. The cases are Bryant v.
General Motors Corporation, filed on March 11, 2005 in
the Circuit Court for Miller County, Arkansas; Hunter v.
General Motors Corporation, filed on January 19, 2005
in Superior Court in Los Angeles, California; Chartrand v.
General Motors Corporation, et al. filed on October 26,2005 in Supreme Court, British Columbia, Canada; and
Goodridge v. General Motors Corporation, et al. filed on
November 18, 2005 in the Superior Court of Justice,
Ontario, Canada. The complaints allege that parking brake spring
clips wear prematurely and cause failure of the parking brake
system, and seek compensatory damages for the cost of correcting
the alleged defect, interest costs and attorney’s fees. The
two Canadian cases also seek punitive damages and “general
damages” of $500 million. On August 15, 2006, the
Miller County Circuit Court in the Bryant case certified
a nationwide class consisting of original and subsequent owners
of 1999 through 2002 GM series 1500
pick-up
trucks and sport utility vehicles equipped with automatic
transmissions and registered in the United States. On
June 19, 2008, the Supreme Court of Arkansas affirmed the
certification decision. We intend to file a petition for
certiorari seeking review of the certification decision in the
U.S. Supreme Court.
* * * * * * *
Environmental
Matters
Greenhouse
Gas Lawsuit
In the case of California ex rel. Lockyer v. General Motors
Corporation, et al., which has been previously reported, the
State of California filed its appeal brief in January 2008, and
the defendants filed their responsive brief in March 2008.
Several groups filed amicus briefs in support of the defendants,
including the State of Michigan, the U.S. Chamber of Commerce
and the National Association of Manufacturers.
* * * * * * *
EPA
Environmental Appeal Board Remands Hazardous Waste Region V
Case, Impacting Regions II and III Enforcements
On June 22, 2008 the EPA Environmental Appeal Board
reversed and remanded a 2006 Administrative Law Judge ruling
that had found us liable for violating hazardous waste rules in
Region V for the handling and storage of used solvents. As
previously reported, EPA Regions II, III and V have brought
enforcement actions against several GM assembly plants seeking
penalties for alleged noncompliance with the Resource
Conservation Recovery Act (RCRA) rules for the handling and
storage of solvents used to purge colors from paint applicators.
In March 2006 an administrative law judge found GM liable for
RCRA violations at three plants in Region V and assessed a
$568,116 penalty. We have appealed.
* * * * * * *
Item 1A.
Risk
Factors
Other than discussed below, there have been no material changes
to the Risk Factors as previously disclosed in Part I,
“Item 1A Risk Factors” in our 2007
10-K.
We have agreed to fund a trust pursuant to the Settlement
Agreement that will require us to contribute significant assets
in a relatively short time period.
If the arrangements contemplated by the Settlement Agreement are
approved and implemented as expected in January 2010, we will be
required to pay or transfer more than $25.0 billion in
assets to the New VEBA in a relatively short time period. This
amount includes $7.0 billion in cash, the transfer of
$4.4 billion in convertible notes that were previously
issued to a wholly-owned subsidiary and mature in 2013, and the
transfer of amounts already funded by us in existing VEBAs.
These payments or transfers will be made in the first quarter of
2010. Further, in 2010, we may transfer an additional
$5.6 billion to the New VEBA, subject to adjustment, or we
may instead opt to make annual payments of varying amounts
between $421 million and $3.3 billion through 2020. We
may also contribute $1.6 billion immediately or opt to make
up to 19 contingent payments of $165 million as necessary
to support the New VEBA’s future solvency. There can be no
assurance that we will be able to obtain all of the necessary
funding that has not been set aside in existing VEBA trusts on
terms that will be acceptable. The liquidity plans announced in
June and July 2008 were designed to assure adequate liquidity
through 2009. If we are unable to obtain funding on terms that
are consistent with our business plans, we may have to delay or
reduce other planned expenditures.
New laws, regulations or policies of governmental
organizations regarding increased fuel economy requirements and
reduced greenhouse gas emissions, or changes in existing ones,
may have a significant negative impact on how we do
business.
We are affected significantly by a substantial amount of
governmental regulations that increase costs related to the
production of our vehicles and impact our product portfolio. We
anticipate that the number and extent of these regulations, and
the costs and changes to our product
line-up to
comply with them, will increase significantly in the future. In
the United States and Europe, for example, governmental
regulation is primarily driven by concerns about the environment
(including
CO2
emissions), vehicle safety and fuel economy. These government
regulatory requirements complicate our plans for global product
development and may result in substantial costs, which can be
difficult to pass through to our customers, and may result in
limits on the types of vehicles we sell and where we sell them,
which can impact revenue.
The Corporate Average Fuel Economy (CAFE) requirements mandated
by the U.S. government pose special concerns. In December 2007,
the United States enacted the Energy Independence and Security
Act of 2007, a new energy law that will require significant
increases in CAFE requirements applicable to cars and light
trucks beginning in the 2011 model year in order to increase the
combined U.S. fleet average for cars and light trucks to at
least 35 miles per gallon by 2020, a 40% increase. The estimated
cost to the automotive industry of complying with this new
standard will likely exceed $100 billion, and our
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. The National Highway
Traffic Safety Administration (NHTSA) has issued a proposed rule
to set the car and truck standards for the 2011 — 2015
model years and to make changes to the form of the standards and
the associated credit mechanism. In comments we and the Alliance
of Automobile Manufacturers, a trade association to which we
belong, submitted we urged NHTSA to consider our concerns about
the accuracy of the technology analyses used by NHTSA to
estimate the costs and benefits of the proposed standards, and
consider revising its overly aggressive rate of increase in the
standards.
In addition, California and 12 other states have adopted a set
of rules establishing
CO2
emission standards that effectively impose similarly increased
fuel economy standards for new vehicles sold in those states (AB
1493 Rules). In addition, there are several other states
considering the adoption of such standards. If stringent
CO2
emission standards are imposed on us on a
state-by-state
basis, the result could be even more disruptive to our business
than the higher CAFE standards discussed above. The automotive
industry has filed legal challenges to these state standards in
California, Vermont and Rhode Island and dealers have filed a
similar challenge in New Mexico. On September 12, 2007, the
U.S. District Court for the District of Vermont rejected the
industry’s position that such state regulation of
CO2
emissions is preempted by federal fuel economy and air pollution
laws. While the plaintiffs including us have appealed this
decision and submitted opening briefs, there can be no assurance
that the lower court’s order will be reversed. On
December 12, 2007, the U.S. District Court for the Eastern
District of California ruled against the federal preemption
arguments made by the automotive industry but did not lift its
order enjoining California from enforcing the AB 1493 Rules in
the absence of a waiver by the Environmental Protection Agency
(EPA). The industry has responded to that ruling by seeking a
permanent injunction against the AB 1493 Rules. A related
challenge in California state court is pending. On
December 21, 2007, the U.S. District Court for the District
of Rhode Island denied the state’s motion to dismiss the
industry challenge and announced steps for the case to proceed
to trial. The defendants in the Rhode Island case have moved for
dismissal of our complaint, and we are preparing a response.
There can be no assurance that these legal challenges to the AB
1493 Rules will succeed.
On February 29, 2008, the EPA formally denied
California’s request for a waiver of federal preemption of
its AB 1493 Rules. As a result, at this time the AB 1493 Rules
cannot be enforced in California or any other state. California
and many other
states and non-governmental organizations, however, have filed
actions in several federal courts to have the EPA’s denial
overturned. The EPA and automotive industry have filed to have
these cases dismissed. In addition, the two leading Presidential
candidates have expressed support for the AB 1493 Rules, and
indicating that the EPA’s decision may be reversed in a
future administration, thereby permitting those Rules to be
enforced in all the states that have adopted or will adopt them.
There can be no assurance that the legal efforts to dismiss or
deny the challenges to the EPA’s action will succeed. As a
result of the failure of the legal efforts, or a different
decision by a successor EPA Administrator, the AB 1493 Rules
might become enforceable.
In addition, a number of countries in Europe are adopting or
amending regulations that establish
CO2
emission standards or other frameworks that effectively impose
similarly increased fuel economy standards for vehicles sold in
those countries, or establish vehicle-related tax structures
based on them.
Delphi is unlikely to emerge from bankruptcy in the
near-term and possibly may not emerge at all.
In January 2008, the U.S. Bankruptcy Court entered an order
confirming Delphi’s POR and related agreements including
certain agreements with us. On April 4, 2008 Delphi
announced that, although it had met the conditions required to
substantially consummate its POR, including obtaining exit
financing, Delphi’s plan investors refused to participate
in a closing that was commenced but not completed on that date.
The current credit markets, the lack of plan investors, and the
challenges facing the auto industry make it difficult for Delphi
to emerge from bankruptcy. As a result, it is unlikely that
Delphi will emerge from bankruptcy in the near term, and it is
possible that it may not emerge successfully or at all. We
believe that Delphi will continue to seek alternative
arrangements to emerge from bankruptcy, but there can be no
assurance that Delphi will be successful in obtaining any
alternative arrangements. The resulting uncertainty could
disrupt our ability to plan future production and realize our
cost reduction goals, and could affect our relationship with the
UAW and result in our providing additional financial support to
Delphi, receiving significantly less than the distributions that
we expect from the resolution of Delphi’s bankruptcy
proceedings and assuming some of Delphi’s obligations to
its workforce and retirees. If Delphi is unable to successfully
emerge from bankruptcy in the near term, it may be forced to
sell all of its assets. As a result, we may be required to pay
additional amounts to secure the parts we need until alternative
suppliers are secured or new contracts are executed with the
buyers of Delphi’s assets. In addition the Benefit
Guarantees may be triggered which would result in additional
liabilities to us. We may also be subject to additional
litigation regarding Delphi.
Financial difficulties, labor stoppages or work slowdowns
at key suppliers could result in a disruption in our operations
and have a material adverse effect on our business.
We rely on many suppliers to provide us with the systems,
components and parts that we need to manufacture our automotive
products and operate our business. In recent years, a number of
these suppliers, including but not limited to Delphi, have
experienced severe financial difficulties and solvency problems
and some have reorganized under the U.S. Bankruptcy Code. This
trend has intensified in recent months. Financial difficulties
or solvency problems at these or other suppliers could
materially adversely affect their ability to supply us with the
systems, components and parts that we need, which could disrupt
our operations including production of certain of our higher
margin vehicles. It may be difficult to find a replacement for
certain suppliers without significant delay. Similarly, a
substantial portion of many of these suppliers’ workforces
are represented by labor unions. Workforce disputes that result
in work stoppages or slowdowns at these suppliers could also
have a material adverse effect on their ability to continue
meeting our needs.
Our significant investment in new technology may not
result in successful vehicle applications.
We intend to invest up to $7.0 billion per year in the next
few years to support our products and to develop new technology.
In some cases, such as hydrogen fuel cells, the technologies are
not yet commercially practical and depend on significant future
technological advances by us and by suppliers, especially in the
area of advanced battery technology. For example, we have
announced that we intend to produce by November 2010 the
Chevrolet Volt, an electric car, which requires battery
technology that has not yet proven to be commercially viable.
There can be no assurance that these advances will occur in a
timely or feasible way, that the funds that we have budgeted for
these purposes will be adequate or that we will be able to
establish our right to these technologies. Moreover, our
competitors and others are pursuing the same technologies and
other competing
technologies, in some cases with more money available, and there
can be no assurance that they will not acquire similar or
superior technologies sooner than we do or on an exclusive basis
or at a significant price advantage.
Our liquidity position could be negatively affected by a
variety of factors, which in turn could have a material adverse
effect on our business.
Our ability to meet our capital requirements over the long-term
(as opposed to the short- and medium-term) will require
substantial liquidity, which will depend on the continued
successful execution of our turnaround plan to return our North
American operations to profitability and positive cash flow and
our ability to take other actions to continue to bolster our
liquidity position including our cash flow initiatives described
in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations —
Liquidity — Recent Initiatives.” These
initiatives are designed to bolster our liquidity position
through 2009, which we consider medium-term. We cannot assure
you we will be able to successfully execute these initiatives.
We can also not assure you that over the long-term we will be
able to maintain a level of cash flows from operating activities
sufficient to meet our capital requirements. We are subject to
numerous risks and uncertainties that could negatively affect
our cash flow and liquidity position in the future. These
include, among other things, the high capital costs relating to
new technology research and implementation, continued
deterioration in the U.S. economy or increases in the price of
fuel, the effects of proposed and new legislation regarding
increased fuel economy requirements and greenhouse gas emissions
and pressure from suppliers to agree to changed payment or other
contract terms. The occurrence of one or more of these events
could weaken our liquidity position as well as limit our ability
to improve our cash flow, which was significantly negative in
this quarter. A weakened liquidity position could materially and
adversely affect our business for example by curtailing our
ability to make important capital expenditures. The current
weakness of the credit markets and the general economic
downturn, and our operating losses in the first half of 2008
could have a significant negative effect on our ability to
borrow funds to meet our anticipated cash needs.
Our significant indebtedness and other obligations of our
automotive operations are significant and could negatively
impact our goal of sustained profitability.
We have a substantial amount of indebtedness, which requires
significant interest and principal payments. At June 30,2008, we had $40.5 billion in loans payable and long-term
debt outstanding for our automotive operations. In addition, we
expect to pay more than $7.0 billion due under the
Settlement Agreement with the UAW in early 2010. If additional
indebtedness is added to current debt levels, the related risks
described below could intensify.
Our significant indebtedness may have several important
consequences, including the following:
•
requiring us to dedicate a significant portion of our cash flow
from operations to the payment of principal and interest on our
indebtedness, which will reduce the funds available for other
purposes such as product development;
•
making it more difficult for us to satisfy our obligations with
respect to our outstanding loans payable, long-term debt and
amounts due under the Settlement Agreement with the UAW;
•
impairing our ability to obtain additional financing for working
capital, capital expenditures, acquisitions, refinancing
indebtedness or other purposes;
•
increasing our vulnerability to adverse economic and industry
conditions;
•
limiting our ability to withstand competitive pressures; and
•
increasing our vulnerability to interest rate increases, since
certain of our borrowings are at variable rates.
Our business may be materially impacted by decreases in
the residual value of off-lease vehicles.
In addition to the impact on GMAC of the residual value of
off-lease vehicles discussed in our 2007
10-K Risk
Factors, we are also negatively affected by decreases in the
residual value of off-lease vehicles through our residual
support programs, our ownership of lease-related assets and the
effect of leasing activity on our retail sales. We record an
estimate of marketing incentive accruals for residual support
and risk sharing programs when vehicles are sold to dealers. To
the extent the residual value of off-lease vehicles decreases,
we are required to increase our estimate of the residual support
required to be provided to GMAC to subvent leases or increase
risk sharing payments to GMAC. We also own certain lease-related
assets that GMAC paid
to us as a dividend prior to the consummation of the GMAC
Transaction, the value of which would be impaired by decreases
in the residual value of off-lease vehicles. In addition,
changes in expected lease residual values may impact the cost of
leasing transactions and the types of leasing transactions
available to end-use customers. Fewer financing options could
make purchasing a vehicle less attractive. Should market
conditions continue to drive further reduction in the residual
value of leased vehicles, we may suspend or eliminate lease
financing. The elimination of this financing alternative could
have a negative effect on our operations.
Any one or more of these consequences could have a material
adverse effect on our business.
GMAC’s automotive finance business is critical to our
operations and provides financing support to a significant share
of our global sales; if GMAC is unable to provide financial
support in its current form our business will be materially
adversely affected.
GMAC’s automotive finance business for North American
Operations and International Operations supports a significant
share of our global sales through lending, leasing and financing
arrangements with dealers and retail and fleet customers. If
GMAC is unable to provide this financial support to our dealers
and customers at the current level we may need to seek a
replacement issuer or originator for our automotive financing
operations. This process would be complicated by the existing
contractual arrangements that GM and GMAC entered into in
connection with the GMAC Transaction, such as the exclusive use
of GMAC to provide leasing and financing incentives to U.S.
customers (other than Saturn buyers). Under these agreements, if
we with GMAC determine that certain credit market conditions
exist, GMAC would not be penalized for failure to provide the
current level of financial support to our dealers and customers,
which could have a negative effect on our sales. Even if
circumstances permit us to replace GMAC, we may not be able to
find a replacement in a timely and cost efficient manner and the
ensuing interruption to our sales process could materially
affect our business.
Risks
related to our 49% equity interest in GMAC
GMAC’s business requires substantial capital, and a
disruption in its funding sources, diminished access to the
capital markets, or increased borrowing costs could have a
material adverse effect on its liquidity and financial
condition.
GMAC’s liquidity and ongoing profitability are, in large
part, dependent upon its timely access to capital and the costs
associated with raising funds in different segments of the
capital markets. GMAC depends and will continue to depend on its
ability to access diversified funding alternatives to meet
future cash flow requirements and to continue to fund its
operations. The capital markets have remained highly volatile
and liquidity has been significantly reduced. These conditions,
in addition to the reduction in GMAC’s credit ratings, have
resulted in increased borrowing costs and GMAC’s inability
to access the unsecured debt markets in a cost-effective manner.
This has resulted in an increased reliance on asset-backed and
other secured sources of funding. Further, GMAC has regular
renewals of outstanding bank loans and credit facilities, and
its inability to renew these loans and facilities as they mature
could have a negative impact on its liquidity position. GMAC
also has significant maturities of unsecured notes due each
year. In order to retire these instruments, GMAC either will
need to refinance this debt or generate sufficient cash to
retire the debt. In addition, continued or further negative
events specific to GMAC or us, could further adversely impact
GMAC’s funding sources. Furthermore, GMAC has recently
provided a significant amount of funding to ResCap, and as a
result any negative events with respect to ResCap could have an
adverse effect on GMAC’s consolidated financial position.
ResCap’s liquidity has been significantly impaired, and may
be further impaired, due to circumstances beyond GMAC’s
control, such as adverse changes in the economy and general
market conditions. Continued deterioration in ResCap’s
business performance could further limit, and recent reductions
in its credit ratings have limited, ResCap’s ability to
access the capital markets on favorable terms. During recent
volatile times in the capital and secondary markets, especially
since August 2007, access to aggregation and other forms of
financing, as well as access to securitization and secondary
markets for the sale of ResCap’s loans, has been severely
constricted. Furthermore, ResCap’s access to capital has
been impacted by changes in the market value of its mortgage
products and the willingness of market participants to provide
liquidity for such products.
ResCap’s liquidity has also been adversely affected, and
may be further adversely affected in the future, by margin calls
under certain of ResCap’s secured credit facilities that
are dependent in part on the lenders’ valuation of the
collateral securing the financing. Each of these credit
facilities allows the lender, to varying degrees, to revalue the
collateral to values that the lender considers to reflect market
values. If a lender determines that the value of the collateral
has decreased, it may initiate a margin call requiring ResCap to
post additional collateral to cover the decrease. When ResCap is
subject to such a margin call, it must provide the lender with
additional collateral or repay a portion of the outstanding
borrowings with minimal notice. Any such margin call could harm
ResCap’s liquidity, results of operation, financial
condition and business prospects. Additionally, in order to
obtain cash to satisfy a margin call, ResCap may be required to
liquidate assets at a disadvantageous time, which could cause
ResCap to incur further losses and adversely affect its results
of operations and financial condition. Furthermore, continued
volatility in the capital markets has made determination of
collateral values uncertain compared to GMAC’s historical
experience, and many of ResCap’s lenders are taking a much
more conservative approach to valuations. As a result, the
frequency and magnitude of margin calls has increased, and GMAC
expects both to remain high compared to historical experience
for the foreseeable future.
Recent developments in the market for many types of mortgage
products (including mortgage-backed securities) have resulted in
reduced liquidity for these assets. Although this reduction in
liquidity has been most acute with regard to nonprime assets,
there has been an overall reduction in liquidity across the
credit spectrum of mortgage products. As a result, ResCap’s
liquidity has been and will continue to be negatively impacted
by margin calls and changes to advance rates on ResCap’s
secured facilities. One consequence of this funding reduction is
that ResCap may decide to retain interests in securitized
mortgage pools that in other circumstances it would sell to
investors, and ResCap will have to secure additional financing
for these retained interests. If ResCap is unable to secure
sufficient financing for them, or if there is further general
deterioration of liquidity for mortgage products, it will
adversely impact ResCap’s business.
ResCap has significant near-term liquidity issues. There
is a significant risk that ResCap will not be able to meet its
debt service obligations and other funding obligations in the
near term.
ResCap expects continued liquidity pressures for the remainder
of 2008 and the early part of 2009. ResCap is highly leveraged
relative to its cash flow. At June 30, 2008, ResCap’s
liquidity portfolio (cash readily available to cover operating
demands from across its business operations and maturing
obligations) totaled $1.5 billion. ResCap has $0.3 billion
aggregate principal amount of notes due in November 2008. Though
in June ResCap extended the maturities of most of its secured,
short-term debt until April and May 2009, ResCap had $3.3
billion of secured, short-term debt and $0.3 billion of
unsecured notes outstanding at June 30, 2008 maturing in
2008, excluding debt of GMAC Bank.
ResCap expects that additional and continuing liquidity
pressure, which is difficult to forecast with precision, will
result from the obligation of its subsidiaries to advance
delinquent principal, interest, property taxes, casualty
insurance premiums and certain other amounts with respect to
mortgage loans that ResCap services that become delinquent.
Recent increases in delinquencies with respect to ResCap’s
servicing portfolio have increased the overall level of such
advances, as well as extending the time over which ResCap
expects to recover such amounts under the terms of its servicing
contracts. ResCap also must find alternate funding sources for
assets that must periodically be withdrawn from some of its
financing facilities as maximum funding periods for those assets
expire. In addition, in connection with the recent restructuring
of ResCap’s credit facilities, ResCap became subject to a
requirement to maintain minimum cash balances outside GMAC Bank
in order to continue its access to those facilities. ResCap will
attempt to meet these and other liquidity demands through a
combination of operating cash and additional asset sales. The
sufficiency of these sources of additional liquidity cannot be
assured, and any asset sales, even if they raise sufficient cash
to meet ResCap’s liquidity needs, may result in losses that
negatively affect ResCap’s overall profitability and
financial condition.
Moreover, even if ResCap is successful in implementing all of
the actions described above, ResCap’s ability to satisfy
its liquidity needs and comply with any covenants included in
its debt agreements requiring maintenance of minimum cash
balances may be affected by additional factors and events (such
as interest rate fluctuations and margin calls) that increase
ResCap’s cash needs making it unable to independently
satisfy near-term liquidity requirements.
Current conditions in the residential mortgage market and
housing markets may continue to adversely affect GMAC’s
earnings and financial condition.
Recently, the residential mortgage market in the United States,
Europe and other international markets in which GMAC conducts
business has experienced a variety of difficulties and changed
economic conditions that adversely affected GMAC’s earnings
and financial condition in 2007 and in the year to date period
ended June 30, 2008. Delinquencies and losses with respect
to ResCap’s nonprime mortgage loans increased significantly
and may continue to increase. Housing prices in many parts of
the United States, the United Kingdom and other international
markets in which GMAC conducts business have also declined or
stopped appreciating, after extended periods of significant
appreciation. In addition, the liquidity provided to the
mortgage sector has recently been significantly reduced. This
liquidity reduction combined with ResCap’s decision to
reduce its exposure to the nonprime mortgage market caused
ResCap’s nonprime mortgage production to decline, and such
declines are expected to continue. Similar trends have emerged
beyond the nonprime sector, especially at the lower end of the
prime credit quality scale, and have had a similar effect on
ResCap’s related liquidity needs and businesses in the
United States, Europe and other international markets in which
GMAC conducts business. These trends have resulted in
significant writedowns to ResCap’s mortgage loans
held-for-sale
and trading securities portfolios and additions to its allowance
for its loan losses for its mortgage loans
held-for-investment
and warehouse lending receivables portfolios. A continuation of
these conditions, which GMAC anticipates in the near term, may
continue to adversely affect GMAC’s financial condition and
results of operations.
Moreover, the continued deterioration of the U.S. housing market
and decline in home prices in 2007 and 2008 in many U.S. and
international markets, which GMAC anticipates will continue for
the near term, are likely to result in increased delinquencies
or defaults on the mortgage assets that ResCap owns and
services. Further, loans that were made based on limited credit
or income documentation also increase the likelihood of future
increases in delinquencies or defaults on mortgage loans. An
increase in delinquencies or defaults will result in a higher
level of credit losses and credit related expenses, as well as
increased liquidity requirements to fund servicing advances, all
of which in turn will reduce GMAC’s revenues and profits.
Higher credit losses and credit-related expenses also could
adversely affect GMAC’s financial condition.
ResCap’s lending volume is generally related to the rate of
growth in U.S. residential mortgage debt outstanding and the
size of the U.S. residential mortgage market. Recently, the rate
of growth in total U.S. residential mortgage debt outstanding
has slowed sharply in response to the reduced activity in the
housing market and national declines in home prices. A decline
in the rate of growth in mortgage debt outstanding reduces the
number of mortgage loans available for ResCap to purchase or
securitize, which in turn could lead to a reduction in its
revenue, profits, and business prospects.
Given the recent disruptions and changes in the mortgage market,
ResCap faces the need to make significant changes in its
business processes and activities. At the same time, ResCap is
experiencing losses of staff resources at many levels, as a
result of both attrition and its previously announced
restructuring. The loss of staff beyond ResCap’s control
increases the difficulty it faces in executing these adaptive
changes to its business, and those difficulties represent an
additional risk to ResCap’s business and operating results.
Recent negative developments in ResCap’s mortgage
markets have led ResCap to reduce the number of mortgage
products it offers.
As a result of decreased liquidity for a number of mortgage
products, including nonprime mortgage products and many products
offered through ResCap’s international businesses, ResCap
no longer offers those products in the affected markets. In
ResCap’s domestic mortgage business, it has shifted the
bulk of its loan production to prime mortgage products that
conform to the requirements of government-sponsored enterprises.
In ResCap’s international business, it generally restricts
originations to those products and markets for which liquidity
remains available, and ResCap has suspended new loan
originations in the United Kingdom, Europe, and Australia. The
products that are currently relatively liquid are generally not
as profitable as the broader range of products ResCap has
traditionally offered. In addition, in the United States and
some other markets, a number of competitors offer similar
mortgage products, resulting in compression on interest margins
and gains on sales. As a result, ResCap’s operations will
generally be less profitable than they would be if ResCap was
able to offer a more diversified product line.
Changes in existing U.S. government-sponsored mortgage
programs, or disruptions in the secondary markets in the United
States or in other countries in which GMAC operates, could
adversely affect its profitability and financial
condition.
The ability of ResCap to generate revenue through mortgage loan
sales to institutional investors in the United States depends to
a significant degree on programs administered by
government-sponsored enterprises such as Fannie Mae, Freddie
Mac, Ginnie Mae, and others that facilitate the issuance of
mortgage-backed securities in the secondary market. These
government-sponsored enterprises play a powerful role in the
residential mortgage industry and ResCap has significant
business relationships with them. Proposals have recently been
enacted in Congress and are under consideration by various
regulatory authorities that would affect the manner in which
these government-sponsored enterprises conduct their business,
including establishing a new independent agency to regulate the
government-sponsored enterprises, to require them to register
their stock with the SEC, to reduce or limit certain business
benefits that they receive from the U.S. government, and to
limit the size of the mortgage loan portfolios that they may
hold. In addition, the government-sponsored enterprises
themselves have been negatively affected by recent mortgage
market conditions, including conditions that have threatened
their access to debt financing. Any discontinuation of, or
significant reduction in, the operation of these
government-sponsored enterprises could adversely affect
GMAC’s revenues and profitability. Also, any significant
adverse change in the level of activity in the secondary market,
including declines in the institutional investors’ desire
to invest in ResCap’s mortgage products, could adversely
affect GMAC’s business.
ResCap uses three primary sales channels to sell its mortgage
loans to the secondary market: whole-loan sales, sales to
government-sponsored enterprises, and securitizations. A
decrease in demand for whole-loan purchasers or the
government-sponsored enterprises, or for the securities issued
in GMAC’s securitizations, could adversely affect
GMAC’s revenues and profitability.
GMAC and certain of its owners are subject to regulatory
agreements that may affect its control of GMAC Bank.
As previously disclosed, on February 1, 2008, Cerberus FIM,
LLC; Cerberus FIM Investors, LLC; and FIM Holdings LLC
(collectively, the FIM Entities), submitted a letter to the
Federal Deposit Insurance Corporation (FDIC) requesting that the
FDIC waive certain of the requirements contained in a two-year
disposition agreement among each of the FIM Entities and the
FDIC that was entered into in connection with our sale of 51% of
the equity interests in GMAC (the Sale Transaction). The Sale
Transaction resulted in a change of control of GMAC Bank, an
industrial bank, which required the approval of the FDIC. Prior
to the Sale Transaction, the FDIC had imposed a moratorium on
the approval of any applications for change in bank control
notices submitted to the FDIC with respect to any industrial
bank. As a condition to granting the application in connection
with the change of control of GMAC Bank during the moratorium,
the FDIC required each of the FIM Entities to enter into a
two-year disposition agreement. That agreement required, among
other things, that by no later than November 30, 2008, the
FIM Entities complete one of the following actions:
(1) become registered with the appropriate federal banking
agency as a depository institution holding company pursuant to
the Bank Holding Company Act or the Home Owners’ Loan Act;
(2) divest control of GMAC Bank to one or more persons or
entities other than prohibited transferees; (3) terminate
GMAC Bank’s status as an FDIC-insured depository
institution; or (4) obtain from the FDIC a waiver of the
requirements set forth in this sentence on the ground that
applicable law and FDIC policy permit similarly situated
companies to acquire control of FDIC-insured industrial banks.
On July 15, 2008, the FDIC determined to address the FIM
Entities’ waiver request through execution of a
10-year
extension of the existing two-year disposition requirement.
Pursuant to the extension, the FIM Entities have until
November 30, 2018, to complete one of the four actions
enumerated above. Certain agreements, which GMAC, GMAC Bank, and
the FIM Entities entered into with the FDIC as a condition to
the FDIC granting the
10-year
extension, require, among other things, both GMAC and GMAC Bank
to maintain specified capital levels. In the event required
levels are not maintained or other provisions of the agreements
are breached, the FDIC could exercise its discretionary powers
and seek to take actions in response. Such actions could include
termination or modification of the
10-year
extension.
GMAC’s profitability and financial condition have
been materially adversely affected by decreases in the residual
value of off-lease vehicles, and such decreases may
continue.
GMAC’s expectation of the residual value of a vehicle
subject to an automotive lease contract is a critical element
used to determine the amount of the lease payments under the
contract at the time the customer enters into it. As a result,
to the extent the
actual residual value of the vehicle, as reflected in the sales
proceeds received upon remarketing, is less than the expected
residual value for the vehicle at lease inception, GMAC incurs
additional depreciation expense
and/or a
loss on the lease transaction. General economic conditions, the
supply of off-lease vehicles, and new vehicle market prices
heavily influence used vehicle prices and thus the actual
residual value of off-lease vehicles. The recent sharp decline
in demand and used vehicle sale prices for sport utility
vehicles and trucks in the United States and Canada has affected
GMAC’s remarketing proceeds for these vehicles, and has
resulted in an impairment of $716 million during the
quarter ended June 30, 2008. These trends may continue. Our
brand image, consumer preference for our products, and our
marketing programs which influence the new and used vehicle
market for our vehicles also influence lease residual values. In
addition, GMAC’s ability to efficiently process and
effectively market off-lease vehicles impacts the disposal costs
and proceeds realized from the vehicle sales. While we provide
support for lease residual values, including through residual
support programs, our support does not in all cases entitle GMAC
to full reimbursement for the difference between the remarketing
sales proceeds for off-lease vehicles and the residual value
specified in the lease contract. Differences between the actual
residual values realized on leased vehicles and GMAC’s
expectations of such values at contract inception could continue
to have a negative impact on GMAC’s profitability and
financial condition.
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.
The markets for automotive and mortgage financing, insurance,
and reinsurance are highly competitive. The market for
automotive financing has grown more competitive as more
consumers are financing their vehicle purchases, primarily in
North America and Europe. GMAC’s mortgage business faces
significant competition from commercial banks, savings
institutions, mortgage companies, and other financial
institutions. GMAC’s insurance business faces significant
competition from insurance carriers, reinsurers, third-party
administrators, brokers, and other insurance-related companies.
Many of GMAC’s competitors have substantial positions
nationally or in the markets in which they operate. Some of its
competitors have lower cost structures, lower cost of capital,
and are less reliant on securitization and sale activities. GMAC
faces significant competition in various areas, including
product offerings, rates, pricing and fees, and customer
service. This competition may increase as GMAC has recently
increased pricing on certain lending activities. If GMAC is
unable to compete effectively in the markets in which it
operates, its profitability and financial condition could be
negatively affected.
The markets for asset and mortgage securitizations and
whole-loan sales are competitive, and other issuers and
originators could increase the amount of their issuances and
sales. In addition, lenders and other investors within those
markets often establish limits on their credit exposure to
particular issuers, originators and asset classes, or they may
require higher returns to increase the amount of their exposure.
Increased issuance by other participants in the market, or
decisions by investors to limit their credit exposure
to — or to require a higher yield for — GMAC
or to automotive or mortgage securitizations or whole loans,
could negatively affect GMAC’s ability and that of its
subsidiaries to price their securitizations and whole-loan sales
at attractive rates. The result would be lower proceeds from
these activities and lower profits for GMAC and its subsidiaries.
* * * * * * *
Item 4.
Submission
of Matters to a Vote of Security Holders
The General Motors Corporation’s annual meeting of
stockholders was held on June 3, 2008. At that meeting, the
following matters were submitted to a vote of the stockholders:
The following nominees for director received the number of votes
set opposite their respective names and were elected to serve on
the Board of Directors:
Final Voting Results
Votes
Percent
Percy N. Barnevik
For
445,096,424
95.2
Withheld
22,206,280
4.8
Erskine B. Bowles
For
445,588,315
95.4
Withheld
21,714,389
4.6
John H. Bryan
For
387,028,314
82.8
Withheld
80,274,390
17.2
Armando M. Codina
For
385,159,390
82.4
Withheld
82,143,314
17.6
Erroll B. Davis, Jr.
For
446,194,951
95.5
Withheld
21,107,753
4.5
George M.C. Fisher
For
384,215,206
82.2
Withheld
83,087,498
17.8
E. Neville Isdell
For
445,270,702
95.3
Withheld
22,032,002
4.7
Karen Katen
For
386,596,988
82.7
Withheld
80,705,716
17.3
Kent Kresa
For
432,775,782
92.6
Withheld
34,526,922
7.4
Ellen J. Kullman
For
433,132,064
92.7
Withheld
34,170,640
7.3
Philip A. Laskawy
For
432,768,252
92.6
Withheld
34,534,452
7.4
Kathryn V. Marinello
For
446,075,076
95.5
Withheld
21,227,628
4.5
Eckhard Pfeiffer
For
429,167,826
91.8
Withheld
38,134,878
8.2
G. Richard Wagoner, Jr.
For
445,313,538
95.3
Withheld
21,989,166
4.7
In addition, 1,095 votes were cast for each of the
following: John Chevedden, James Dollinger, Dean
Fitzpatrick, Lucy Kessler, John Lauve, Louis Lauve III,
Erik Nielsen, Danny Taylor, William Walde, and William
Woodward, M.D.
Participation Agreement (“Participation Agreement”)
dated as of June 4, 2008 between General Motors Corporation,
GMAC LLC and Cerberus ResCap Financing LLC, incorporated herein
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed on June 9, 2008.
23
Consent of Hamilton, Rabinovitz and Associates
31
.a
Section 302 Certification of the Chief Executive Officer
31
.b
Section 302 Certification of the Chief Financial Officer
32
.a
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
.b
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)
Participation Agreement (“Participation Agreement”)
dated as of June 4, 2008 between General Motors Corporation,
GMAC LLC and Cerberus ResCap Financing LLC, incorporated herein
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed on June 9, 2008.
23
Consent of Hamilton, Robinovitz and Associates
31
.a
Section 302 Certification of the Chief Executive Officer
31
.b
Section 302 Certification of the Chief Financial Officer
32
.a
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
.b
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
115
Dates Referenced Herein and Documents Incorporated by Reference