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GM > SEC Filings for GM > Form 10-Q on 9-Nov-2011All Recent SEC Filings

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Form 10-Q for GENERAL MOTORS CO


9-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General Motors Company is sometimes referred to in this Quarterly Report on Form 10-Q as "we," "our," "us," "ourselves," the "Company," "General Motors" or "GM." General Motors Corporation is sometimes referred to in this Quarterly Report on Form 10-Q, for the periods on or before July 9, 2009, as "Old GM."

Presentation and Estimates

Basis of Presentation

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 the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K), as filed with the Securities and Exchange Commission (SEC).

We analyze the results of our business through our five segments: GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), GM South America (GMSA) and General Motors Financial Company, Inc. (GM Financial). Nonsegment operations are classified as Corporate. Corporate includes investments in Ally Financial, Inc. (Ally Financial), certain centrally recorded income and costs, such as interest, income taxes and corporate expenditures and certain nonsegment specific revenues and expenses.

Consistent with industry practice, market share information includes estimates of industry sales in certain countries where public reporting is not legally required or otherwise available on a consistent basis.

Use of Estimates in the Preparation of the Financial Statements

The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the amounts of assets and liabilities at the reporting date and the amounts of revenue and expenses in the periods presented. We believe that the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent uncertainties in making estimates actual results could differ from the original estimates, requiring adjustments to these balances in future periods.

Prior Period Financial Statements Conformed to Current Period Presentation

In the three and nine months ended September 30, 2011 we have recorded foreign currency exchange gains and losses on debt as non-operating items. This is a change from prior period presentations in which foreign currency exchange gains and losses on debt were recorded in Automotive cost of sales. We have reclassified the prior periods to conform to our current presentation. The effects of these reclassifications decreased Automotive cost of sales and Interest income and other non-operating income, net by $119 million and $68 million in the three and nine months ended September 30, 2010.

Overview

Our Company

Automotive

We are a leading global automotive company. Our vision is to design, build and sell the world's best vehicles. We seek to distinguish our vehicles through superior design, quality, reliability, telematics (wireless voice and data) and infotainment and safety within their respective segments. Our business is diversified across products and geographic markets. With a global network of independent dealers we meet the local sales and service needs of our retail and fleet customers. In the nine months ended September 30, 2011 72.0% of our vehicle sales volume was generated outside the United States, including 42.6% from emerging markets, such as Brazil, Russia, India and China (collectively BRIC), which have experienced the industry's highest volume growth.


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GENERAL MOTORS COMPANY AND SUBSIDIARIES

Our automotive business is organized into four geographically-based segments:

GMNA, with sales, manufacturing and distribution operations in the U.S., Canada and Mexico and distribution operations in Central America and the Caribbean, represented 32.6% of our vehicle sales volume in the nine months ended September 30, 2011. In the nine months ended September 30, 2011 we had the largest market share of any competitor in this market at 18.8%.

GME has sales, manufacturing and distribution operations across Western and Central Europe. GME's vehicle sales volume, which in addition to Western and Central Europe, includes Eastern Europe (including Russia and the other members of the Commonwealth of Independent States among others) represented 19.4% of our vehicle sales volume in the nine months ended September 30, 2011. In the nine months ended September 30, 2011 we had the number four market share in this market at 8.8%. GMIO distributes Chevrolet brand vehicles which, when sold in Europe, are included in GME vehicle sales volume and market share data.

GMIO has sales, manufacturing and distribution operations in Asia-Pacific, Eastern Europe (including Russia and the other members of the Commonwealth of Independent States among others), Africa and the Middle East. GMIO's vehicle sales volume, which includes Asia-Pacific, Africa and the Middle East is our largest segment by vehicle sales volume and represented 36.2% of our vehicle sales volume including sales through our joint ventures in the nine months ended September 30, 2011. In the nine months ended September 30, 2011 we had the number two market share for this market at 9.4% and the number one market share in China. In the nine months ended September 30, 2011 GMIO derived 77.0% of its vehicle sales volume from China. GMIO records the financial results of Chevrolet brand vehicles that it distributes and sells in Europe.

GMSA, with sales, manufacturing and distribution operations in Brazil, Argentina, Colombia, Ecuador and Venezuela as well as sales activities in Bolivia, Chile, Paraguay, Peru and Uruguay represented 11.8% of our vehicle sales volume in the nine months ended September 30, 2011. In the nine months ended September 30, 2011 we had the largest market share for this market at 18.9% and the number three market share in Brazil. In the nine months ended September 30, 2011 GMSA derived 58.1% of its vehicle sales volume from Brazil.

We offer a global vehicle portfolio of cars, crossovers and trucks. We are committed to leadership in vehicle design, quality, reliability, telematics and infotainment and safety, as well as to developing key energy efficiency, energy diversity and advanced propulsion technologies, including electric vehicles with range extending capabilities such as the Chevrolet Volt.

Automotive Financing - GM Financial

GM Financial specializes in purchasing retail automobile installment sales contracts originated by franchised and select independent dealers in connection with the sale of used and new automobiles. GM Financial also offers lease products through GM franchised dealerships that target customers with prime and sub-prime credit bureau scores. GM Financial generates revenue and cash flows primarily through the purchase, retention, subsequent securitization and servicing of finance receivables. To fund the acquisition of receivables prior to securitization, GM Financial uses available cash and borrowings under its credit facilities. GM Financial earns finance charge income on the finance receivables and pays interest expense on borrowings under its credit facilities. GM Financial periodically transfers receivables to securitization trusts that issue asset-backed securities to investors. The securitization trusts are special purpose entities (SPEs) that are also variable interest entities that meet the requirements to be consolidated in the financial statements.

Specific Management Initiatives

The execution of certain management initiatives is critical to continue the improvement in our results of operations and financial condition. These management initiatives are subsequently discussed.


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Focus on Chinese Market

We view the Chinese market, the fastest growing global market by volume of vehicles sold, as important to our global growth strategy and are employing a multi-brand strategy, led by our Buick and Chevrolet brands. In the coming years, we plan to increasingly leverage our global architectures to increase the number of nameplates under the Buick, Chevrolet and Cadillac brands in China and continue to grow our business under the Wuling, Jiefang and Baojun brands.

The following table summarizes our direct ownership interests in our Chinese joint ventures, collectively referred to as China JVs:

                                                                 Ownership Interest
                                                  September 30, 2011             September 30, 2010
Shanghai General Motors Co. Ltd. (SGM)(a)                         49%                            49%
Shanghai GM (Shenyang) Norsom Motor Co.,
Ltd. (SGM Norsom)                                                 25%                            25%
Shanghai GM Dong Yue Motors Co., Ltd.
(SGM DY)                                                          25%                            25%
Shanghai GM Dong Yue Powertrain (SGM
DYPT)                                                             25%                            25%
SAIC-GM-Wuling Automobile Co., Ltd.
(SGMW)                                                            44%                            34%
FAW-GM Light Duty Commercial Vehicle,
Ltd. (FAW-GM)                                                     50%                            50%
Pan Asia Technical Automotive Center Co.,
Ltd. (PATAC)                                                      50%                            50%
Shanghai OnStar Telematics Co., Ltd.
(Shanghai OnStar)                                                 40%                            40%
Shanghai Chengxin Used Car Operation and
Management Co., Ltd. (Shanghai Chengxin
Used Car)                                                         33%                            33%

(a) Ownership interest in SGM was 49% in the period February 1, 2010 through September 30, 2010 and 50% in the month of January 2010.

The following table summarizes certain key operational and financial data for the China JVs (dollars in millions, vehicles in thousands):

                                       Three Months Ended            Nine Months Ended
                                         September 30,                 September 30,
                                      2011            2010          2011          2010
    Total wholesale vehicles (a)          627             568         1,910         1,775
    Market share (b)                    14.1%           13.6%         13.7%         13.3%
    Total net sales and revenue    $    7,730      $    6,253     $  22,918     $  18,840
    Net income                     $      813      $      740     $   2,567     $   2,296

(a) Includes export vehicle sales.

(b) Represents vehicle sales in China.

                                         September 30,      December 31,
                                             2011               2010
            Cash and cash equivalents   $         4,750     $       5,247
            Debt                        $            82     $          61

Automotive Financing Strategy

Our automotive finance strategy centers around ensuring that our dealers and customers have consistently available, transparent and competitive financing options throughout the business and credit cycles.


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Historically Ally Financial has provided a majority of the financing for our dealers and a significant portion of the financing for our customers in the U.S., Canada, and other major international markets where we operate. Ally Financial historically has been our exclusive financing partner for incentivized retail financing programs in our major markets. Ally Financial continues to provide the majority of the financing needs of our dealers and customers.

The market disruption of 2008 and 2009 highlighted the need to ensure certainty of availability of credit throughout economic cycles in specific segments of the automotive financing market. In the U.S. and Canada we identified leasing and sub-prime lending as underserved areas that could benefit from increased financing sources and competition. In 2009 we partnered with U.S. Bank to offer incentivized leasing programs and with GM Financial to offer incentivized sub-prime retail financing in the U.S. We also partnered with TD Bank to offer incentivized retail financing programs in Canada.

In October 2010 we acquired GM Financial to further bolster our offerings in the leasing and sub-prime financing segments in the U.S. and Canada. We believe that by having our own capabilities in key segments of the market we will be able to achieve more competition and better service from the market, while ensuring certainty of availability through the business cycles.

On April 1, 2011 GM Financial acquired FinanciaLinx Corporation, an independent leasing company in Canada, to provide leasing to our customers throughout Canada. Given the importance of leasing and the current lack of availability of leasing offerings to our customers in the Canadian market (due to regulatory restrictions preventing banks and bank holding companies from offering leasing in Canada), we believe having a captive financing offering in Canada is strategically important to our business. GM Financial began originating leases for GM customers in Canada via FinanciaLinx Corporation in April 2011.

We will continue to expand the business of GM Financial in targeted areas that we view as strategic and to otherwise evaluate opportunities in specific segments of the automotive financing market, both in the United States and internationally. We expect any expansion of GM Financial or any arrangements with other financing providers will complement our important relationship with Ally Financial.

Restructuring and Other Initiatives

We have previously executed various restructuring and other initiatives, and we plan to execute additional initiatives in the future, if necessary, in order to align manufacturing capacity and other costs with prevailing global automotive production and to improve the utilization of remaining facilities.

Opel/Vauxhall Restructuring Activities

Restructuring and early retirement programs in Spain, the U.K. and Belgium were essentially completed in 2010 and we also initiated a program in Germany in 2010. Through September 30, 2011 these programs had a total cost of $0.9 billion and affected a total of 5,800 employees and included the closure of the Antwerp, Belgium facility. We expect to incur an additional $0.3 billion, primarily in 2011 and 2012, to complete these programs, which will affect an additional 1,600 employees.

Increased GMNA Production Volume

Increased U.S. industry vehicle sales and demand for our products have resulted in increased production volumes for GMNA. In the three and nine months ended September 30, 2011 GMNA produced 740,000 vehicles and 2.4 million vehicles. This represents an increase of 4.7% and 11.6% compared to 707,000 vehicles and 2.1 million vehicles in the three and nine months ended September 30, 2010.

Increased U.S. Vehicle Sales

GMNA dealers in the U.S. sold 641,000 vehicles and 1.9 million vehicles in the three and nine months ended September 30, 2011. This represents an increase of 83,000 vehicles (or 14.8%) and 264,000 vehicles (or 16.1%) from our U.S. vehicle sales in the three and nine months ended September 30, 2010. This increase reflects our brand rationalization strategy to focus our product engineering and design and marketing on our four brands. This strategy has resulted in increased consumer demand for certain products such as the Chevrolet Cruze, Chevrolet Equinox, GMC Terrain, Buick LaCrosse and Cadillac SRX.


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2011 GM-UAW Labor Agreement

On September 28, 2011 the 2011 GM-UAW Labor Agreement (Labor Agreement) which is a collectively bargained labor agreement between us and the International Union, United Automobile, Aerospace and Agriculture Implement Workers of America (UAW) was ratified. The Labor Agreement covers the wages, hours, benefits and other terms and conditions of employment for our UAW represented employees. The key terms and provisions of the Labor Agreement are:

Lump sum payments to U.S. hourly employees of $5,000 were paid in October 2011 totaling $0.2 billion. Additional lump sum payments of $1,000 will be paid annually in June of 2012, 2013 and 2014 totaling $0.1 billion. The lump sum payments will be amortized over the four year agreement period.

An annual payment of $250 per U.S. hourly employee upon attainment of specific U.S. vehicle quality targets.

An increase in wages for certain entry level employees hired on or after October 1, 2007.

The Personal Retirement Plan, which is a cash balance pension plan for entry level employees, will be frozen on January 2, 2012 and terminated on June 30, 2012, subject to required regulatory approvals. Participants in the Personal Retirement Plan and all employees hired on or after October 1, 2007 will participate in a defined contribution plan when the Personal Retirement Plan terminates.

The Legal Services Plan, which provides legal services to U.S. hourly employees and retirees, will be terminated on December 31, 2013. In September 2011 we remeasured the Legal Services Plan resulting in a decrease of $0.3 billion in the other postretirement benefits (OPEB) liability and a pre-tax increase in the prior service credit component of Accumulated other comprehensive income, which will be amortized through December 31, 2013.

The Profit Sharing Plan formula will be based on GMNA earnings before interest and taxes (EBIT) adjusted and is effective for the 2011 plan year. The Profit Sharing payment is capped at $12,000 per employee per year.

Cash severance incentive programs which may range up to $0.1 billion for skilled trade employees will be included in our restructuring liability upon irrevocable acceptances by both parties.

We plan to make additional manufacturing investments of more than $2.0 billion to create or retain more than 6,300 UAW jobs during the four year agreement period.

Effect of Earthquake, Tsunami and Other Resulting Events in Japan

Although we have no production facilities in Japan, and do not generate material revenues from Japan, we do consume materials and components for our global operations from suppliers located in Japan. Due to the earthquake and tsunami in Japan there have been shortages of materials and components from certain Japanese based suppliers. These shortages have minimally affected our vehicle production and resulted in us temporarily suspending production at one facility in the three months ended March 31, 2011. We have managed these shortages by optimizing the usage of parts that are, or will be, in short supply, pursuing alternate suppliers and modifying production schedules. The effect of any lost production in the nine months ended September 30, 2011, and in the three months and year ending December 31, 2011 is and will be immaterial.

Venezuelan Exchange Regulations

Our Venezuelan subsidiaries changed their functional currency from Bolivar Fuerte (BsF), the local currency, to the U.S. Dollar, our reporting currency, on January 1, 2010 because of the hyperinflationary status of the Venezuelan economy. Pursuant to the official devaluation of the Venezuelan currency and establishment of the dual fixed exchange rates (essential rate of BsF 2.60 to $1.00 and nonessential rate of BsF 4.30 to $1.00) in January 2010, we remeasured the BsF denominated monetary assets and liabilities held by our Venezuelan subsidiaries at the nonessential rate of 4.30 BsF to $1.00. The remeasurement resulted in a charge of $25 million recorded in Automotive cost of sales in the three months ended March 31, 2010.

In June 2010 the Venezuelan government introduced additional foreign currency exchange control regulations, which imposed restrictions on the use of the parallel foreign currency exchange market, thereby making it more difficult to convert BsF to U.S. Dollars. We periodically accessed the parallel exchange market, which historically enabled entities to obtain foreign currency for


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transactions that could not be processed by the Commission for the Administration of Currency Exchange (CADIVI). The restrictions on the foreign currency exchange market could affect our Venezuelan subsidiaries' ability to pay non-BsF denominated obligations that do not qualify to be processed by CADIVI at the official exchange rates as well as our ability to benefit from those operations.

In December 2010 another official devaluation of the Venezuelan currency was announced that eliminated the essential rate effective January 1, 2011. The devaluation did not have an effect on the 2010 consolidated financial statements; however, it has affected results of operations in 2011 because our Venezuelan subsidiaries no longer realize gains that result from favorable foreign currency exchanges processed by CADIVI at the essential rate for the requests submitted subsequent to the devaluation date.

Canadian Health Care Trust

As previously reported, in December 2009 and May 2010 in furtherance of implementing its restructuring plan and pursuant to a June 2009 agreement between General Motors of Canada Limited (GMCL) and the Canadian Auto Workers Union (CAW) to establish an independent Canadian Health Care Trust (HCT) to provide retiree healthcare benefits to certain active and retired employees, litigation commenced regarding GMCL's right to unilaterally amend and terminate postretirement healthcare benefits. The parties reached a settlement to consensually resolve the litigation, which was approved on September 13, 2011 by the Ontario Superior Court and was approved on September 19, 2011 by the Quebec Superior Court. At September 30, 2011 the settlement was not implemented because certain conditions precedent to the settlement had not been met, including the expiration of the time period allowed for individual CAW retirees and surviving spouses to decide to opt out of participation in the class action process. GMCL is obligated to make a payment to the HCT of CAD $1.0 billion within 10 days of the HCT implementation date, October 31, 2011, which it will fund out of its CAD $1.0 billion escrow funds, adjusted for the net difference between the amount of retiree monthly contributions received during the period January 1, 2010 through the HCT implementation date less the cost of benefits paid for claims incurred by covered employees during this period and certain related costs. GMCL also provided to the HCT a CAD $800 million note payable with interest accruing at an annual rate of 7.0% starting January 1, 2010 with five equal annual installments of CAD $256 million due December 31, 2014 through 2018. In addition, GMCL will make two additional payments of CAD $130 million each on December 31, 2014 and 2015. Concurrent with the implementation of the HCT, GMCL is legally released from all obligations associated with the cost of providing retiree healthcare benefits to CAW retirees and surviving spouses bound by the class action process and to CAW active employees as of June 8, 2009. As a result of conditions precedent to the settlement not having yet been achieved as of September 30, 2011, there was no accounting recognition for the HCT at September 30, 2011.

In October 2011 the time period allowed for individual CAW retirees and surviving spouses to decide to opt out of participation in the class action process elapsed. The conditions precedent to the settlement have been achieved and the HCT implementation date occurred on October 31, 2011, with the transfer of escrow funds to occur in November. We will account, in the three months ending December 31, 2011 for the related termination of CAW hourly retiree healthcare benefits as a settlement, and record a gain of approximately $800 million, based upon the difference between the fair value of the notes of approximately $1.1 billion and cash contributed and the healthcare plan obligation (as at the implementation date) relating to individuals who in the future will have their health care benefits provided by the HCT.

Projected Fourth Quarter Results

With respect to the projected fourth quarter results for 2011, our independent registered public accounting firm has not compiled, examined, or performed any procedures with respect to this information, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, it.

Based on current industry outlook, we expect our EBIT, excluding the HCT gain of approximately $800 million, in the fourth quarter of 2011 to be similar to the fourth quarter of 2010 as a result of seasonal trends in North America and weakness in Europe.

EBIT for the year ending December 31, 2011 is expected to show solid improvement over 2010. However, we do not expect to achieve our target to break even on an EBIT-adjusted basis before restructuring charges in Europe, due to deteriorating economic conditions.


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As the fourth quarter of 2011 is still in progress, any forecast of our operating results is inherently speculative, is subject to substantial uncertainty, and our actual results may differ materially from management's views. Refer to the section entitled "Risk Factors" for a discussion of risks that could affect our future operating results. Our views for the fourth quarter rely in large part upon assumptions and analyses we have developed.

As a result of the foregoing considerations and the other limitations of non-GAAP measures described elsewhere, investors are cautioned not to place undue reliance on this forecasted financial information. There are material limitations inherent in stating our views of our results for future periods. Refer to "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.

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