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GM > SEC Filings for GM > Form 10-Q on 31-Oct-2012All Recent SEC Filings

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Form 10-Q for GENERAL MOTORS CO


31-Oct-2012

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."

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, 2011 (2011 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.

Supplemental Consolidating Information

We are providing supplemental consolidating information in order to provide more transparency into the financial position, operating results and cash flows of our two businesses, Automotive and GM Financial.

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 revenues 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.

Change in Presentation of Financial Statements

In 2012 we changed the presentation of our condensed consolidated balance sheet, condensed consolidated statements of cash flows and certain notes to the condensed consolidated financial statements to classify the assets and liabilities of GM Financial as current or non-current and to combine line items which were either of a related nature or not individually material. We have made corresponding reclassifications to the comparable information for all periods presented.

Overview

Automotive

Our vision is to design, build and sell the world's best vehicles. 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 and diversity and advanced propulsion technologies, including electric vehicles. Our business is diversified across products and geographic markets. We meet the local sales and service needs of our retail and fleet customers with a global network of independent dealers. In the nine months ended September 30, 2012, 71.7% of our vehicle sales volume was generated outside the U.S.

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 sales and distribution


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operations in Central America and the Caribbean, represented 32.8% of our vehicle sales volume in the nine months ended September 30, 2012 and we had the largest market share in this market at 17.0%.
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 17.8% of our vehicle sales volume in the nine months ended September 30, 2012. In the nine months ended September 30, 2012 we estimate we had the number four market share in this market at 8.5%. 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 is our largest segment by vehicle sales volume. GMIO represented 38.1% of our global vehicle sales volume, including sales through our joint ventures, in the nine months ended September 30, 2012. In the nine months ended September 30, 2012 we estimate we had the number two market share in this market at 9.3% and the number one market share in China. In the nine months ended September 30, 2012 GMIO derived 78.6% 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, distribution and financing operations in Brazil, Argentina, Colombia, Ecuador and Venezuela as well as sales and distribution operations in Bolivia, Chile, Paraguay, Peru and Uruguay, represented 11.3% of our vehicle sales volume in the nine months ended September 30, 2012. In the nine months ended September 30, 2012 we estimate we had the number two market share in this market at 18.1%. We had the number three market share in Brazil. In the nine months ended September 30, 2012 GMSA derived 60.2% of its vehicle sales volume from Brazil.

Based on our current outlook we expect our fourth quarter earnings before interest and taxes (EBIT)-adjusted to follow typical seasonal trends and be similar to or slightly better than 2011.

Automotive Financing - GM Financial

GM Financial specializes in purchasing retail automobile installment sales contracts originated by GM and non-GM franchised and select independent dealers in connection with the sale of used and new automobiles. GM Financial also offers lease products through GM dealerships in connection with the sale of used and new automobiles that target customers with sub-prime and prime credit bureau scores. GM Financial primarily generates revenue and cash flows 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 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 that are also variable interest entities that meet the requirements to be consolidated in the financial statements.

In April 2012 GM Financial commenced commercial lending activities in the U.S. centered on floor plan financing of dealer vehicle inventory and dealer loans to finance dealer sites, facilities, facility improvements and working capital. These loans are made on a secured basis. We believe the availability of financing for our dealers is important to our business.

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 Baojun, Jiefang and Wuling brands. We operate in Chinese markets through a number of joint ventures and maintaining good relations with our joint ventures partners, which are affiliated with the Chinese government, is an important part of our China growth strategy.

Refer to Note 8 to our condensed consolidated financial statements for our direct ownership interests in our Chinese joint ventures, collectively referred to as China JVs.

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


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                                           Three Months Ended                              Nine Months Ended
                               September 30, 2012      September 30, 2011      September 30, 2012     September 30, 2011
Total wholesale vehicles(a)                692                      627                    2,144                  1,910
Market share(b)                           14.4 %                   14.1 %                   14.5 %                 13.7 %
Total net sales and revenue   $          7,945        $           7,730       $           24,215     $           22,918
Net income                    $            769        $             813       $            2,363     $            2,567


__________


(a) Including vehicles exported to markets outside of China.

(b) Market share for China market.

                           September 30, 2012     December 31, 2011
Cash and cash equivalents $             4,815    $             4,679
Debt                      $                99    $               106

Automotive Financing Strategy

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

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 continues to provide the majority of the financing needs of our dealers and customers.

We utilize 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, which we believe will improve pricing to our dealers and retail customers, and better service from the market, while ensuring certainty of financing availability through the business cycles.

In April 2011 GM Financial began originating leases for our customers in Canada via FinanciaLinx Corporation. 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 important to our business. In August 2012 GM Financial began offering consumer sub-prime financing in Canada.

GM Financial submitted a bid to acquire certain international operations of Ally Financial during the three months ended September 30, 2012. There is no assurance that GM Financial will be successful in acquiring any of Ally Financial's international operations. However, if GM Financial is successful in completing a transaction it will expand its operations materially in international markets. Such expansion could have significant impacts on its business, results of operations, liquidity and financial condition. If GM Financial is the successful bidder, its consolidated assets could potentially more than double, and it could incur substantial amounts of indebtedness, including secured debt. Depending on the scale of operations GM Financial may acquire and the amount of equity that it invests in such a transaction or transactions, its consolidated debt and other liabilities could also potentially more than double.

In April 2012 GM Financial commenced commercial lending activities in the U.S. centered on floor plan financing of dealer vehicle inventory and dealer loans to finance dealer sites, facilities, facility improvements and working capital. These loans are made on a secured basis. We believe the availability of financing for our dealers is important to our business.

In 2012 in order to increase our competitiveness and benefit from increased financing sources, we entered into arrangements with banks to provide incentivized retail financing to our customers in the U.S. and Canada, our Vauxhall customers in the U.K. and our Holden customers in Australia.

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 U.S. and internationally. We expect any expansion of GM Financial or any arrangements with other financing providers will complement our important relationship with Ally Financial.


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European Outlook

In the first three quarters of 2012 the European automotive industry has been severely affected by the ongoing sovereign debt crisis, high unemployment and a lack of consumer confidence coupled with overcapacity. European automotive industry sales to retail and fleet customers were 14.5 million vehicles in the nine months ended September 30, 2012, representing a 4.7% decrease compared to the corresponding period in 2011. In the nine months ended September 30, 2012 GME's market share declined to 8.5% from 8.7% in the year ended December 31, 2011 and the region suffered EBIT (loss)-adjusted of $1.1 billion in the nine months ended September 30, 2012 compared to EBIT (loss)-adjusted of $0.2 billion in the corresponding period in 2011.

In response, we are executing various actions to strengthen our European operations and increase our competitiveness. The key areas of the plan include:
(1) investments in our product portfolio; (2) a revised brand strategy; (3) significant management changes; and (4) reducing material, development and production costs and further leveraging synergies from the alliance between us and Peugeot S.A. (PSA), as subsequently discussed.

Notwithstanding the above we believe it is likely that adverse economic conditions, and their effect on the European automotive industry, will not improve significantly during the remainder of 2012 and we expect to continue to incur losses in the region as a result. Such losses in 2012 could be further impacted depending on the level of restructuring activity taken in the fourth quarter. In addition the success of our plan will depend on a combination of our ability to execute the actions contemplated, as well as external factors which are outside of our control. Despite the adverse economic developments affecting the European automotive industry, we currently believe our long-lived assets are recoverable. We are targeting GME to be in a break-even EBIT-adjusted position by the middle of the decade.

Should there be a further deterioration in the outlook and our ability to generate cash in the region we may be required to test certain long-lived assets for recoverability. If the result of such analysis indicates that the assets are not recoverable and the carrying amount of such assets exceeds their estimated fair value, the resulting non-cash impairment charge may have a material effect on our results of operations.

Alliance with Peugeot S.A.

In February 2012 we entered into an agreement with PSA to create a long-term and broad-scale global strategic alliance that is expected to leverage the combined strengths and capabilities of the two companies, contribute to our profitability and improve our competitiveness in Europe. In connection with the alliance, in March 2012 we acquired a seven percent equity stake in PSA for $0.4 billion and in June 2012 we entered into a long-term exclusive service agreement with Gefco, a wholly-owned subsidiary of PSA, to provide logistics services in Europe beginning in 2013. The alliance is structured around two main pillars: the sharing of vehicle platforms, components and modules and the creation of a global purchasing joint venture for the sourcing of commodities, components and other goods and services. The implementation of the strategic alliance is subject to the execution of various definitive agreements which will outline the terms of the joint business activities.

Restructuring Activities

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.

Due to the expected closure of the Oshawa Consolidation Plant in June 2014, impacted employees will be eligible for a voluntary restructuring separation incentive program in accordance with the existing collective bargaining agreement that provides cash and a car voucher. This may range up to $0.1 billion and will be included in our restructuring liability, net of existing liabilities, upon irrevocable acceptance by both parties.

Our 2011 labor agreement with the International Union, United Automobile, Aerospace and Agriculture Implement Workers of America included cash severance incentive programs which were completed at March 31, 2012 for skilled trade U.S. hourly employees. A total of 1,400 skilled trade U.S. hourly employees participated in these programs at a total cost of $0.1 billion and was recorded upon irrevocable acceptances by both parties. Substantially all of the program cost was recorded in the three months ended March 31, 2012.

Through September 30, 2012 separation and early retirement programs in Germany had a total cost of $0.3 billion and affected


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a total of 1,900 employees. We expect to complete these programs in 2013 and incur an additional $0.1 billion, which will affect an additional 350 employees.

In the nine months ended September 30, 2012 GMIO and GMSA recorded charges of $23 million and $0.1 billion related to additional separation programs implemented in Korea and Brazil.

Benefit Plan Changes

U.S. Salaried Defined Benefit Pension Plan

In January 2012 we amended the salaried pension plan to cease the accrual of additional benefits effective September 30, 2012. This amendment resulted in a curtailment which decreased the liability and decreased the net pre-tax actuarial loss component of Accumulated other comprehensive loss by $0.3 billion. Active plan participants will receive additional contributions in the defined contribution plan starting in October 2012.

In May 2012 we entered into an agreement in which the salaried pension plan will purchase a group annuity contract from an insurance company that requires the insurance company to pay and administer future annuity payments to certain of our salaried retirees. Following the execution of the agreement 44,000 retired participants in the salaried pension plan were offered lump-sum distributions and approximately 30% of the offers were accepted by the plan participants resulting in lump-sum payments of $3.6 billion. Retired salaried employees that were not offered lump-sum distributions or those that declined the lump-sum offer will continue to receive annuity payments from the insurance company in accordance with the terms of the group annuity contract. Approximately 118,000 salaried retirees were affected by changes depending on retirement date and eligibility. Due to completion of the regulatory review and meeting all closing conditions, we expect to purchase the group annuity contract on November 1, 2012. We loaned $2.2 billion and contributed $0.7 billion to the plan. Currently it is expected that the required funding for the existing salaried pension plan will be approximately $2.6 billion. Amounts loaned to the plan in excess of the funding requirements will be repaid to us. We expect to incur pre-tax charges against earnings of approximately $2.9 billion ($3.4 billion after tax) in the fourth quarter of 2012 which will be treated as special charges. The tax expense of $0.5 billion would result from the removal of income tax allocations between Accumulated other comprehensive loss and operations in prior years. The ongoing annual impact to earnings will be $0.2 billion unfavorable due to a decrease in pension income. Upon completion we expect to account for the transactions as a settlement of pension obligations of approximately $25.1 billion in the fourth quarter of 2012 and the plan will be terminated effective November 1, 2012.

In August 2012 the salaried pension plan was amended to divide the plan. A new legally separate defined benefit pension plan was created primarily for active and terminated vested participants. The existing salaried pension plan will now cover the majority of retirees currently receiving payments. The underlying benefits offered to the plans' participants were unchanged. The remeasurement on August 1, 2012 increased the pension liability and the net pre-tax actuarial loss component of Accumulated other comprehensive loss by $0.7 billion, due primarily to a decrease in the discount rate from 4.21% to 3.37% on a weighted-average basis, partially offset by actual asset returns in excess of expected amounts.

In August 2012 lump-sum distributions were made from the existing salaried pension plan to retired plan participants who elected to receive a lump-sum payment instead of their annuity. These distributions resulted in a partial plan settlement necessitating a plan remeasurement for the existing salaried pension plan on August 31, 2012. The settlement resulted in a pre-tax loss of $54 million. The effect on our financial condition was insignificant.

With the lump-sum payments of $3.6 billion and the expected settlement of approximately $25.1 billion we will have reduced our pension obligation by approximately $28.7 billion.

Canadian Salaried Defined Benefit Plans

In June 2012 we amended the Canadian salaried pension plan to cease the accrual of additional benefits effective December 31, 2012. Active plan participants will receive additional contributions in the defined contribution plan starting in January 2013. We also amended the Canadian salaried retiree healthcare plan to eliminate post-65 healthcare benefits for employees retiring on or after July 1, 2014. In conjunction with this change we amended the plan to offer either a monthly monetary payment to a defined contribution plan for health care or an annual lump-sum cash payment to a defined contribution plan for health care in lieu of the benefit coverage provisions formerly provided under the healthcare plan.

2012 CAW Labor Agreement


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In September 2012 we entered into a collectively bargained labor agreement with the Canadian Auto Workers Union (CAW), which was ratified on September 27, 2012. The agreement covers the wages, hours, benefits and other terms and conditions of employment of the CAW represented employees. The key terms and provisions of the agreement are:

Lump-sum payments of Canadian Dollar (CAD) $3,000 to certain CAW employees were made in October 2012 and additional lump-sum payments of CAD $2,000 will be paid annually in December of 2013, 2014, and 2015. The-lump sum payments will be amortized over the four year agreement.

Hourly employees who retire on or after January 1, 2013 will be offered a new lump-sum distribution option at retirement in the defined benefit pension plan and new hires will be covered by a hybrid defined benefit/defined contribution pension plan. The lump-sum payment option had an insignificant effect on the defined benefit pension plan and will be recognized in the year-end plan remeasurement.

Due to the expected closure of the Oshawa Consolidation Plant in June 2014, impacted employees will be eligible for a voluntary separation incentive program in accordance with the existing collective bargaining agreement that provides cash and a car voucher. This may range up to $0.1 billion and will be included in our restructuring liability, net of existing liabilities, upon irrevocable acceptance by both parties.

We plan to make total manufacturing program investments of $0.7 billion during the life of the agreement subject to market conditions and demand.

Venezuelan Exchange Regulations

Our Venezuelan subsidiaries utilize the U.S. Dollar as their functional currency because of the hyperinflationary status of the Venezuelan economy. The Venezuelan government has introduced foreign exchange control regulations which make it more difficult to convert Bolivar Fuerte (BsF) to U.S. Dollars. These regulations affect our Venezuelan subsidiaries' ability to pay non-BsF denominated obligations that do not qualify to be processed by the Venezuela currency exchange agency at the official exchange rates.

Refer to Note 2 to our condensed consolidated financial statements for additional details regarding amounts pending government approval for settlement and the net assets of our Venezuelan subsidiaries.


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Consolidating Results of Operations
(Dollars in Millions)
                                               Three Months Ended September 30, 2012                                   Three Months Ended September 30, 2011
                                    Automotive      GM Financial     Eliminations     Consolidated      Automotive       GM Financial       Eliminations       Consolidated
Net sales and revenue
Automotive sales and revenue     $     37,062       $         -     $        -       $     37,062     $      36,328     $           -     $         -        $       36,328
GM Financial revenue                        -               514              -                514                 -               391               -                   391
Total net sales and revenue            37,062               514              -             37,576            36,328               391               -                36,719
Costs and expenses
Automotive cost of sales               32,731                 -              4             32,735            31,733                 -               1                31,734
GM Financial operating expenses             -               105              -                105                 -                88               -                    88
. . .
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