UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
---- 1934
For the transition period from to
Commission file number 1-143
GENERAL MOTORS CORPORATION
--------------------------
(Exact Name of Registrant as Specified in its Charter)
STATE OF DELAWARE 38-0572515
----------------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
300 Renaissance Center, Detroit, Michigan 48265-3000
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (313) 556-5000
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes X. No .
---
As of July 31, 2005, there were outstanding 565,503,422 shares of the
issuer's $1-2/3 par value common stock.
Website Access to Company's Reports
General Motor's (GM'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.
1
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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 2005 and 2004
(as restated) 3
Supplemental Information to the Consolidated Statements
of Income for the Three Months and Six Months Ended
June 30, 2005 and 2004 (as restated) 4
Consolidated Balance Sheets as of June 30, 2005,
December 31, 2004, and June 30, 2004 (as restated) 5
Supplemental Information to the Consolidated Balance
Sheets as of June 30, 2005, December 31, 2004,
and June 30, 2004 (as restated) 6
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2005 and 2004
(as restated) 7
Supplemental Information to the Condensed Consolidated
Statements of Cash Flows for the Six Months Ended
June 30, 2005 and 2004 (as restated) 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 38
Item 4. Controls and Procedures 39
Part II - Other Information
Item 1. Legal Proceedings 39
Item 2(c) Purchases of equity securities 39
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 6. Exhibits 41
Signatures 42
Certifications
Exhibit 31.1 Section 302 Certification of the Chief Executive Officer 43
Exhibit 31.2 Section 302 Certification of the Chief Financial Officer 44
Exhibit 32.1 Certification of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 45
Exhibit 32.2 Certification of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 46
2
PART I
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(As (As
restated) restated)
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions except per share amounts)
Total net sales and revenues $48,469 $49,254 $94,242 $97,084
------ ------ ------ ------
Cost of sales and other expenses 40,089 39,778 79,402 78,551
Selling, general, and
administrative expenses 5,432 5,171 10,321 10,180
Interest expense 3,712 2,839 7,391 5,623
------ ------ ------ ------
Total costs and expenses 49,233 47,788 97,114 94,354
------ ------ ------ ------
Income (loss) before income
taxes, equity income
and minority interests (764) 1,466 (2,872) 2,730
Income tax expense (benefit) (305) 302 (1,240) 610
Equity income (loss) and
minority interests 173 213 242 465
--- ----- ----- -----
Net income (loss) $(286) $1,377 $(1,390) $2,585
=== ===== ===== =====
Basic earnings (loss) per share
attributable to
common stock (Note 9) $(0.51) $2.44 $(2.46) $4.58
==== ==== ==== ====
Earnings (loss) per share
attributable to common stock
assuming dilution (Note 9) $(0.51) $2.42 $(2.46) $4.54
==== ==== ==== ====
Reference should be made to the notes to consolidated financial statements.
3
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(As (As
restated) restated)
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions)
AUTOMOTIVE AND OTHER OPERATIONS
Total net sales and revenues $40,178 $41,202 $77,481 $81,339
------ ------ ------ ------
Cost of sales and other expenses 38,048 37,259 74,954 73,690
Selling, general, and
administrative expenses 3,320 3,144 6,157 6,167
------ ------ ------ ------
Total costs and expenses 41,368 40,403 81,111 79,857
------ ------ ------ ------
Interest expense 671 596 1,356 1,158
Net expense from transactions
with Financing and Insurance
Operations 100 59 187 127
--- --- ----- -----
Income (loss) before income
taxes, equity income, and
minority interests (1,961) 144 (5,173) 197
Income tax (benefit) (694) (188) (2,001) (325)
Equity income (loss) and
minority interests 173 213 245 467
------ --- ------ ---
Net income (loss) - Automotive
and Other Operations $(1,094) $545 $(2,927) $989
===== === ===== ===
FINANCING AND INSURANCE OPERATIONS
Total revenues $8,291 $8,052 $16,761 $15,745
----- ----- ------ ------
Interest expense 3,041 2,243 6,035 4,465
Depreciation and amortization
expense 1,404 1,333 2,802 2,663
Operating and other expenses 1,952 2,190 4,095 4,109
Provisions for financing and
insurance losses 797 1,023 1,715 2,102
----- ----- ------ ------
Total costs and expenses 7,194 6,789 14,647 13,339
Net income from transactions
with Automotive and
Other Operations (100) (59) (187) (127)
----- ----- ------ ------
Income before income taxes,
equity income, and
minority interests 1,197 1,322 2,301 2,533
Income tax expense 389 490 761 935
Equity income (loss) and
minority interests - - (3) (2)
----- ----- ----- -----
Net income - Financing and
Insurance Operations $808 $832 $1,537 $1,596
=== === ===== =====
The above Supplemental Information is intended to facilitate analysis of General
Motors Corporation's businesses: (1) Automotive and Other Operations; and (2)
Financing and Insurance Operations.
Reference should be made to the notes to consolidated financial statements.
4
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(As
restated)
June 30, June 30,
2005 Dec. 31, 2004
(Unaudited) 2004 (Unaudited)
---------- ---- ----------
ASSETS (dollars in millions)
Cash and cash equivalents $32,261 $35,993 $29,901
Marketable securities 23,013 21,737 20,816
------ ------ ------
Total cash and marketable securities 55,274 57,730 50,717
Finance receivables - net 178,137 199,600 192,023
Loans held for sale 26,903 19,934 17,393
Accounts and notes receivable (less allowances) 18,465 21,236 16,989
Inventories (less allowances) (Note 3) 13,350 12,247 12,274
Deferred income taxes 27,640 26,241 27,379
Net equipment on operating leases (less
accumulated depreciation) 36,076 34,214 32,321
Equity in net assets of nonconsolidated
affiliates 4,969 6,776 6,381
Property - net 40,325 39,020 37,578
Intangible assets - net (Note 4) 4,947 4,925 4,696
Other assets 60,512 57,680 57,709
------- ------- -------
Total assets $466,598 $479,603 $455,460
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable (principally trade) $28,694 $28,830 $26,377
Notes and loans payable 283,621 300,279 277,027
Postretirement benefits other than pensions 30,525 28,111 31,691
Pensions 9,722 9,455 7,559
Deferred income taxes 6,657 7,078 8,101
Accrued expenses and other liabilities 81,425 77,727 76,641
------- ------- -------
Total liabilities 440,644 451,480 427,396
Minority interests 902 397 328
Stockholders' equity
$1-2/3 par value common stock (outstanding,
565,503,422; 565,132,021; and
564,721,304 shares) 943 942 941
Capital surplus (principally additional
paid-in capital) 15,255 15,241 15,181
Retained earnings 12,468 14,428 14,772
------ ------ ------
Subtotal 28,666 30,611 30,894
Accumulated foreign currency translation
adjustments (1,645) (1,194) (1,685)
Net unrealized gains on derivatives 331 589 369
Net unrealized gains on securities 687 751 557
Minimum pension liability adjustment (2,987) (3,031) (2,399)
------- ------- -------
Accumulated other comprehensive loss (3,614) (2,885) (3,158)
------- ------- -------
Total stockholders' equity 25,052 27,726 27,736
------- ------- -------
Total liabilities and stockholders' equity $466,598 $479,603 $455,460
======= ======= =======
Reference should be made to the notes to consolidated financial statements.
5
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED BALANCE SHEETS
(As
restated)
June 30, June 30,
2005 Dec. 31, 2004
(Unaudited) 2004 (Unaudited)
---------- ---- ----------
ASSETS (dollars in millions)
Automotive and Other Operations
Cash and cash equivalents $12,445 $13,148 $13,182
Marketable securities 3,629 6,655 8,319
------ ------- ------
Total cash and marketable securities 16,074 19,803 21,501
Accounts and notes receivable (less allowances) 8,087 6,713 6,396
Inventories (less allowances) (Note 3) 12,818 11,717 11,576
Net equipment on operating leases (less
accumulated depreciation) 6,723 6,488 6,914
Deferred income taxes and other current assets 10,570 10,794 10,876
------ ------ ------
Total current assets 54,272 55,515 57,263
Equity in net assets of nonconsolidated
affiliates 4,969 6,776 6,381
Property - net 38,480 37,170 35,684
Intangible assets - net (Note 4) 1,658 1,599 1,412
Deferred income taxes 18,976 17,399 18,316
Other assets 41,415 40,844 41,657
------- ------- -------
Total Automotive and Other Operations assets 159,770 159,303 160,713
Financing and Insurance Operations
Cash and cash equivalents 19,816 22,845 16,719
Investments in securities 19,384 15,082 12,497
Finance receivables - net 178,137 199,600 192,023
Loans held for sale 26,903 19,934 17,393
Net equipment on operating leases (less
accumulated depreciation) 29,353 27,726 25,407
Other assets 33,235 35,113 30,708
Net receivable from Automotive and Other
Operations 2,846 2,426 2,004
------- ------- -------
Total Financing and Insurance Operations
assets 309,674 322,726 296,751
------- ------- -------
Total assets $469,444 $482,029 $457,464
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Automotive and Other Operations
Accounts payable (principally trade) $25,361 $24,257 $23,084
Loans payable 1,563 2,062 2,625
Accrued expenses 44,390 46,147 46,726
Net payable to Financing and Insurance
Operations 2,846 2,426 2,004
------ ------- ------
Total current liabilities 74,160 74,892 74,439
Long-term debt 31,043 30,460 29,814
Postretirement benefits other than pensions 25,815 23,406 27,721
Pensions 9,629 9,371 7,489
Other liabilities and deferred income taxes 15,946 15,657 15,467
------- ------- -------
Total Automotive and Other Operations
liabilities 156,593 153,786 154,930
Financing and Insurance Operations
Accounts payable 3,333 4,573 3,293
Debt 251,015 267,757 244,588
Other liabilities and deferred income taxes 32,549 27,790 26,589
------- ------- -------
Total Financing and Insurance Operations
liabilities 286,897 300,120 274,470
------- ------- -------
Total liabilities 443,490 453,906 429,400
Minority interests 902 397 328
Total stockholders' equity 25,052 27,726 27,736
------- ------- -------
Total liabilities and stockholders' equity $469,444 $482,029 $457,464
======= ======= =======
The above Supplemental Information is intended to facilitate analysis of General
Motors Corporation's businesses: (1) Automotive and Other Operations; and
(2) Financing and Insurance Operations.
Reference should be made to the notes to consolidated financial statements.
6
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
--------------------------
(As
restated)
2005 2004
---- ----
(dollars in millions)
Net cash provided by operating activities
(Note 1) $2,489 $559
Cash flows from investing activities
Expenditures for property (2,944) (3,201)
Investments in marketable securities -
acquisitions (10,830) (6,466)
Investments in marketable securities -
liquidations 10,269 7,064
Net originations and purchases of mortgage
servicing rights (784) (816)
Increase in finance receivables (5,970) (17,556)
Proceeds from sales of finance receivables 17,692 9,012
Operating leases - acquisitions (8,378) (7,118)
Operating leases - liquidations 3,258 3,992
Investments in companies, net of cash acquired 1,355 (32)
Other (2,411) 982
----- ------
Net cash provided by (used in) investing
activities (Note 1) 1,257 (14,139)
Cash flows from financing activities
Net (decrease) increase in loans payable (8,411) 2,137
Long-term debt - borrowings 30,440 37,784
Long-term debt - repayments (32,144) (30,986)
Cash dividends paid to stockholders (570) (564)
Other 3,619 2,804
----- ------
Net cash (used in) provided by financing
activities (7,066) 11,175
Effect of exchange rate changes on cash and cash
equivalents (412) (248)
------ ------
Net decrease in cash and cash equivalents (3,732) (2,653)
Cash and cash equivalents at beginning of the
period 35,993 32,554
------ ------
Cash and cash equivalents at end of the period $32,261 $29,901
====== ======
Reference should be made to the notes to consolidated financial statements.
7
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO THE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Automotive and Financing and
Other Insurance
Six Months Ended June 30,
------------------------------------
(As
restated)
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions)
Net cash (used in) provided by operating
activities (Note 1) $(2,138) $955 $4,627 $(396)
Cash flows from investing activities
Expenditures for property (2,813) (3,038) (131) (163)
Investments in marketable securities -
acquisitions (271) (855) (10,559) (5,611)
Investments in marketable securities -
liquidations 3,137 1,603 7,132 5,461
Net change in mortgage services rights - - (784) (816)
Increase in finance receivables - - (5,970) (17,556)
Proceeds from sales of finance receivables - - 17,692 9,012
Operating leases - acquisitions - - (8,378) (7,118)
Operating leases - liquidations - - 3,258 3,992
Net investing activity with Financing and
Insurance Operations 1,000 - - -
Investments in companies, net of cash
acquired 1,355 (53) - 21
Other (591) 110 (1,820) 872
----- ----- ----- ------
Net cash provided by (used in) investing
activities (Note 1) 1,817 (2,233) 440 (11,906)
Cash flows from financing activities
Net increase (decrease) in loans payable 46 (437) (8,457) 2,574
Long-term debt - borrowings 25 756 30,415 37,028
Long-term debt - repayments (20) (55) (32,124) (30,931)
Net financing activity with Automotive &
Other - - (1,000) -
Cash dividends paid to stockholders (570) (564) - -
Other - - 3,619 2,804
--- --- ----- ------
Net cash (used in) provided by financing
activities (519) (300) (7,547) 11,475
Effect of exchange rate changes on cash and
cash equivalents (283) (176) (129) (72)
Net transactions with Automotive/Financing
Operations 420 512 (420) (512)
--- ----- ----- -----
Net decrease in cash and cash equivalents (703) (1,242) (3,029) (1,411)
Cash and cash equivalents at beginning of
the period 13,148 14,424 22,845 18,130
------ ------ ------ ------
Cash and cash equivalents at end of the
period $12,445 $13,182 $19,816 $16,719
====== ====== ====== ======
The above Supplemental Information is intended to facilitate analysis of General
Motors Corporation's businesses: (1) Automotive and Other Operations; and (2)
Financing and Insurance Operations. Classification of cash flows for Financing
and Insurance Operations is consistent with presentation in GM's Consolidated
Statement of Cash Flows. See Note 1.
Reference should be made to the notes to consolidated financial statements.
8
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the U.S.
for interim financial information. In the opinion of management, all adjustments
(consisting of only normal recurring items), which are necessary for a fair
presentation have been included. The results for interim periods are not
necessarily indicative of results which may be expected for any other interim
period or for the full year. The consolidated financial statements include the
accounts of General Motors Corporation and domestic and foreign subsidiaries
that are more than 50% owned, principally General Motors Acceptance Corporation
and Subsidiaries (GMAC), (collectively referred to as the "Corporation,"
"General Motors" or "GM"). In addition, GM consolidates variable interest
entities (VIEs) for which it is deemed to be the primary beneficiary. General
Motors' share of earnings or losses of affiliates is included in the
consolidated operating results using the equity method of accounting when GM is
able to exercise significant influence over the operating and financial
decisions of the investee. GM encourages reference to the GM and GMAC Annual
Reports on Form 10-K for the period ended December 31, 2004 and the GMAC
Quarterly Report on Form 10-Q for the period ended June 30, 2005, filed
separately with the U.S. Securities and Exchange Commission (SEC).
GM presents its primary financial statements on a fully consolidated basis.
Transactions between businesses have been eliminated in the Corporation's
consolidated financial statements. These transactions consist principally of
borrowings and other financial services provided by Financing and Insurance
Operations (FIO) to Automotive and Other Operations (Auto & Other).
To facilitate analysis, GM presents supplemental information to the
statements of income, balance sheets, and statements of cash flows for the
following businesses: (1) Auto & Other, which consists of the design,
manufacturing, and marketing of cars, trucks and related parts and accessories;
and (2) FIO, which consists primarily of GMAC. GMAC provides a broad range of
financial services, including consumer vehicle financing, full-service leasing
and fleet leasing, dealer financing, car and truck extended service contracts,
residential and commercial mortgage services, vehicle and homeowners' insurance,
and asset-based lending.
Restatement of Quarterly 2004 Financial Statements for Out-of-Period Adjustments
GM has made certain adjustments to restate previously reported quarterly
financial results for 2004 that do not affect GM's 2004 total annual results,
cash flows, or year-end 2004 financial position.
During the fourth quarter of 2004, internal controls that had been put into
place in connection with GM's Sarbanes-Oxley Section 404 program at GMAC's
residential mortgage businesses identified certain out-of-period adjustments.
The majority of these amounts resulted from items detected and recorded in the
fourth quarter of 2004 that relate to prior 2004 quarters. As a result, GM has
restated its 2004 quarterly and year-to-date financial statements. The most
significant of these restatement adjustments relate to: (1) the estimation of
fair values of certain interests in securitized assets, (2) the accounting for
deferred income taxes related to certain secured financing transactions; and (3)
the income statement effects of consolidating certain mortgage transfers
previously recognized as sales.
Upon identification of these out-of-period adjustments, GM analyzed their
effect, together with the effect of out-of-period adjustments related to Auto &
Other that had been previously considered immaterial to GM on a consolidated
basis, and concluded that, in the aggregate, they were significant enough to
warrant restatement of GM's 2004 quarterly results. The most significant of the
Auto & Other out-of-period adjustments relates to GM's accounting for the
Medicare Prescription Drug, Improvement and Modernization Act of 2003, which was
initially reported in the first quarter of 2004 pursuant to FASB Staff Position
(FSP) No. FAS 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP
106-1 permitted companies to recognize the effect of the Act beginning with its
enactment date (December 8, 2003), or defer recognition until the issuance of
final rules by the FASB. In the second quarter of 2004, FSP 106-2 was issued
which superseded FSP 106-1 and clarified how to account for the effect of the
Act under circumstances where a company's other postretirement employee benefits
(OPEB) plan has a plan year-end that is different from the company's fiscal
year-end. This second quarter clarification provided guidance on the accounting
for the effect of the Act in a manner different than GM had applied prior to
restatement. A summary of the significant effects of the restatement follows:
9
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 1. Financial Statement Presentation (continued)
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2004
As As
previously previously
reported * As restated reported * As restated
---------- ----------- ---------- -----------
(dollars in millions except per share amounts)
Total net sales and revenues $49,148 $49,254 $96,833 $97,084
Income before income taxes,
equity income, and minority
interests $1,457 $1,466 $2,758 $2,730
Income tax expense 306 302 579 610
Minority interests (23) (23) (46) (46)
Earnings of nonconsolidated
associates 213 236 488 511
----- ----- ----- -----
Net income $1,341 $1,377 $2,621 $2,585
===== ===== ===== =====
Basic earnings per share
attributable to common stock $2.37 $2.44 $4.64 $4.58
==== ==== ==== ====
Average number of shares of
common stock outstanding -
basic (in millions) 565 565 565 565
Earnings per share attributable
to common stock assuming dilution $2.36 $2.42 $4.61 $4.54
==== ==== ==== ====
Average number of shares of
common stock outstanding -
diluted (in millions) 568 568 569 569
Net income (loss) by reportable
operating segment / region
Automotive and Other Operations
GM North America (GMNA) $328 $355 $779 $756
GM Europe (GME) (45) (45) (161) (161)
GM Latin America/Africa/Mid-East
(GMLAAM) 10 10 11 11
GM Asia Pacific (GMAP) 236 259 511 534
Other Operations (34) (34) (151) (151)
-- -- --- ---
Net income - Automotive and
Other Operations 495 545 989 989
Financing and Insurance Operations
Net income - Financing and
Insurance Operations 846 832 1,632 1,596
----- ----- ----- -----
Net income $1,341 $1,377 $2,621 $2,585
===== ===== ===== =====
*As reported in Form 10-Q for the quarter ended June 30, 2004.
Statements of Cash Flows
After considering the concerns raised by the staff of the SEC as of December
31, 2004, management concluded that certain amounts in the Consolidated
Statements of Cash Flows for the year ended December 31, 2004 should be
reclassified to appropriately present net cash used in operating activities and
net cash used in investing activities. These amounts for the six months ended
June 30, 2004 have been reclassified to be consistent with the six months ended
June 30, 2005.
The Corporation's previous policy was to classify all the cash flow effects
of providing wholesale loans to its independent dealers by GM's Financing and
Insurance Operations as an investing activity in its Consolidated Statements of
Cash Flows. This policy, when applied to the financing of inventory sales, had
the effect of presenting an investing cash outflow and an operating cash inflow
even though there was no cash inflow or outflow on a consolidated basis. The
Corporation has changed its policy to eliminate this intersegment activity from
its Consolidated Statements of Cash Flows and, as a result of this change, all
10
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 1. Financial Statement Presentation (continued)
cash flow effects related to wholesale loans are reflected in the operating
activities section of the Condensed Consolidated Statement of Cash Flows for the
six months ended June 30, 2005 and 2004. This reclassification better reflects
the financing of the sale of inventory as a non-cash transaction to GM on a
consolidated basis and eliminates the effects of intercompany transactions.
The following table shows the effects of this reclassification for the six
months ended June 30, 2004, consistent with the 2005 presentation (dollars in
millions):
Net cash provided by operating activities as previously
reported $7,599
Reclassification (7,040)
-----
Revised net cash provided by operating activities $559
===
Net cash used in investing activities as previously
reported $(21,179)
Reclassification 7,040
------
Revised net cash used in investing activities $(14,139)
======
Presentation of Delphi Receivable
As of June 30, 2005 GM's Consolidated Balance Sheet reflects a change in
presentation of a receivable due from Delphi Corporation (Delphi). The
receivable represents amounts that Delphi owes to GM for OPEB relating to Delphi
employees who were formerly GM employees and subsequently transferred back to GM
as job openings at GM became available to them under certain employee "flowback"
arrangements included in the 1999 Separation Agreement between GM and Delphi. GM
is responsible to pay for the OPEB of the subject employees. In accordance with
the terms of the 1999 Separation Agreement, Delphi will compensate GM for the
total OPEB attributable to services rendered by the subject employees from their
original GM service date through the date the subject employees flowed back to
GM from Delphi. In prior periods this amount was netted against the OPEB
liability carried on GM's balance sheet. As a result of the change in
presentation, GM's June 30, 2005 Consolidated Balance Sheet reflects an $819
million increase in the amount presented under "Other Assets" and a
corresponding liability increase under "Postretirement Benefits Other than
Pensions." Cash settlement between GM and Delphi with respect to this receivable
is scheduled to occur at the time of the employees' estimated retirement dates.
GM has the right to offset the amounts owed by Delphi under this arrangement
against amounts GM owes to Delphi for the purchase of Delphi products. At June
30, 2005, GM owed approximately $1.8 billion to Delphi for such purchases in
North America.
New Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) revised
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123R), requiring companies to record share-based payment
transactions as compensation expense at fair market value. SFAS No. 123R further
defines the concept of fair market value as it relates to such arrangements.
Based on SEC guidance issued in Staff Accounting Bulletin (SAB) 107 in April
2005, the provisions of this statement will be effective for General Motors as
of January 1, 2006. The Corporation began expensing the fair market value of
newly granted stock options and other stock based compensation awards to
employees pursuant to SFAS No. 123 in 2003; therefore this statement is not
expected to have a material effect on GM's consolidated financial position or
results of operations.
In March 2005, the FASB released FASB Staff Position (FSP) FIN 46(R)-5, which
addresses whether a corporation should consider whether it holds an implicit
interest in a variable interest entity (VIE) or potential VIE when specific
conditions exist to determine if the guidance in FASB Interpretation No. 46
(Revised 2003), "Consolidation of Variable Interest Entities" (FIN 46(R)),
should be applied. GM had adopted FIN 46(R) as of January 1, 2004. GM adopted
FSP FIN 46(R)-5 upon issuance. The Interpretation did not have an effect on GM's
consolidated financial position or results of operations.
11
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 1. Financial Statement Presentation (concluded)
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143, Accounting
for Asset Retirement Obligations." FIN 47 requires an entity to recognize a
liability for the fair value of a conditional asset retirement obligation when
incurred if the liability's fair value can be reasonably estimated. This
interpretation is effective for fiscal years ending after December 15, 2005.
Management does not expect this interpretation to have a material impact on GM's
consolidated financial position or results of operations.
In April 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," requiring retrospective application as the required method for
reporting a change in accounting principle, unless impracticable or a
pronouncement includes specific transition provisions. This statement also
requires that a change in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. This statement carries
forward the guidance in APB Opinion No. 20, "Accounting Changes," for the
reporting of the correction of an error and a change in accounting estimate.
This statement is effective for accounting changes and correction of errors made
in fiscal years beginning after December 15, 2005. This statement is not
expected to have a material effect on GM's consolidated financial position or
results of operations.
NOTE 2. Acquisition and Disposal of Businesses
On February 3, 2005, GM completed the purchase of 16.6 million newly-issued
shares of common stock in GM Daewoo Auto & Technology Company (GM Daewoo,
formerly referred to as GM-DAT) for approximately $49 million. This increased
GM's ownership in GM Daewoo to 48.2% from 44.6%. No other shareholders in GM
Daewoo participated in the issue. On June 28, 2005, GM purchased from Suzuki
Motor Corporation (Suzuki) 6.9 million shares of outstanding common stock in GM
Daewoo for approximately $21 million. This increased GM's ownership in GM Daewoo
to 50.9%. Accordingly, as of June 30, 2005, GM Daewoo was consolidated by GM.
This increased GM's total assets and liabilities by approximately $4.7 billion
and $4.5 billion, respectively, including one-time increases of $1.6 billion of
cash and marketable securities and $1.3 billion of long-term debt. GM has not
yet completed its allocation of the total purchase price of GM Daewoo to its net
assets.
The following unaudited financial information for the three and six months
ended June 30, 2005 and 2004 represents amounts attributable to GM Daewoo on a
basis consistent with giving effect to the increased ownership and consolidation
as of January 1, 2004 (dollars in millions). The pro forma effect on net income
is not significant compared to equity income recognized.
Pro-forma Pro-forma
Three Months Ended Six Months Ended
June 30, June 30
-----------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Total net sales and revenues $1,497 $1,047 $2,668 $2,039
Income (loss) before income
taxes, equity income and
minority interests $59 $34 $43 $18
On February 13, 2005, GM entered into certain agreements with Fiat S.p.A.
(Fiat), under which GM and Fiat agreed to terminate and liquidate all joint
ventures between them and GM would acquire certain strategic assets from Fiat.
Effective May 13, 2005 the liquidation of these joint ventures and GM's
acquisition of certain strategic assets from Fiat was completed. As a result,
GM regained complete ownership of all of its respective assets originally
contributed to each joint venture, GM acquired a 50% interest in a new joint
venture limited to operating the powertrain manufacturing plant in
Bielsko-Biala, Poland, that currently produces the 1.3 SDE diesel engine, and
GM will co-own with Fiat key powertrain intellectual property, including the
SDE and JTD diesel engines and the M20-32 six-speed manual transmission. This
resulted in an increase of approximately $1.4 billion and $2.0 billion to assets
and liabilities, respectively, in GM's Consolidated Balance Sheet as of June 30,
2005.
On April 4, 2005, GM completed the sale of Electro-Motive Division (EMD) to
an investor group led by Greenbriar Equity Group LLC and Berkshire Partners LLC.
The sale covered substantially all of the EMD businesses, and both the LaGrange,
Illinois and London, Ontario manufacturing facilities. This transaction did not
have a material effect on GM's consolidated financial position or results of
operations. The final consideration is contingent upon a closing date balance
sheet audit.
12
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 3. Inventories
Inventories included the following (dollars in millions):
June 30, Dec. 31, June 30,
2005 2004 2004
----- ---- ----
Automotive and Other Operations
-------------------------------
Productive material, work in process, and
supplies $5,364 $4,838 $5,324
Finished product, service parts, etc. 8,757 8,321 7,838
------ ------ ------
Total inventories at FIFO 14,121 13,159 13,162
Less LIFO allowance (1,303) (1,442) (1,586)
------ ------ ------
Total inventories (less allowances) $12,818 $11,717 $11,576
Financing and Insurance Operations
----------------------------------
Off-lease vehicles 532 530 698
------ ------ ------
Total consolidated inventories (less
allowances) $13,350 $12,247 $12,274
====== ====== ======
NOTE 4. Goodwill and Acquired Intangible Assets
The components of the Corporation's acquired intangible assets as of June 30,
2005, and 2004 were as follows (dollars in millions):
Gross Net
Carrying Accumulated Carrying
June 30, 2005 Amount Amortization Amount
------------------------------------
Automotive and Other Operations
-------------------------------
Amortizing intangible assets:
Patents and intellectual property rights $510 $93 $417
Non-amortizing intangible assets:
Goodwill 526
Pension intangible asset 715
-----
Total goodwill and intangible assets $1,658
-----
Financing and Insurance Operations
----------------------------------
Amortizing intangible assets:
Customer lists and contracts $74 $45 29
Trademarks and other 40 22 18
Covenants not to compete 18 18 -
--- -- --
Total $132 $85 $47
=== ==
Non-amortizing intangible assets:
Goodwill 3,242
-----
Total goodwill and intangible assets 3,289
-----
Total consolidated goodwill and intangible
assets $4,947
=====
13
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 4. Goodwill and Acquired Intangible Assets (concluded)
Gross Net
Carrying Accumulated Carrying
June 30, 2004 Amount Amortization Amount
------------------------------------
Automotive and Other Operations
-------------------------------
Amortizing intangible assets:
Patents and intellectual property rights $303 $50 $253
Non-amortizing intangible assets:
Goodwill 540
Pension intangible asset 619
-----
Total goodwill and intangible assets $1,412
-----
Financing and Insurance Operations
----------------------------------
Amortizing intangible assets:
Customer lists and contracts $65 $35 30
Trademarks and other 40 18 22
Covenants not to compete 18 18 -
--- -- --
Total $123 $71 $52
=== ==
Non-amortizing intangible assets:
Goodwill 3,232
-----
Total goodwill and intangible assets 3,284
-----
Total consolidated goodwill and intangible
assets $4,696
=====
Annual amortization expense relating to the existing intangible assets for
each of the next five years is estimated at $33 million to $61 million.
The changes in the carrying amounts of goodwill for the six months ended June
30, 2005, and 2004, were as follows (dollars in millions):
Total
Auto &
GMNA GME Other GMAC Total GM
---- --- ----- ---- --------
Balance as of December 31, 2004 $154 $446 $600 $3,274 $3,874
Goodwill acquired during the period - - - 3 3
Effect of foreign currency
translation (7) (67) (74) (35) (109)
--- --- --- ----- -----
Balance as of June 30, 2005 $147 $379 $526 $3,242 $3,768
=== === === ===== =====
Balance as of December 31, 2003 $154 $413 $567 $3,223 $3,790
Goodwill acquired during the period - - - 5 5
Effect of foreign currency
translation (2) (20) (22) 4 (18)
Other (5) - (5) - (5)
--- --- --- ----- -----
Balance as of June 30, 2004 $147 $393 $540 $3,232 $3,772
=== === === ===== =====
NOTE 5. Investment in Nonconsolidated Affiliates
Nonconsolidated affiliates of GM identified herein are those entities in
which GM owns an equity interest and for which GM uses the equity method of
accounting, because GM has the ability to exert significant influence over
decisions relating to their operating and financial affairs. GM's significant
affiliates, and the percent of GM's current equity ownership, or voting
interest, in them include the following: Japan - Fuji Heavy Industries Ltd.
(20.1% at June 30, 2005 and 2004), Suzuki Motor Corporation (20.2% at June 30,
2005 and 20.3% at June 30, 2004); China - Shanghai General Motors Co., Ltd (50%
at June 30, 2005 and 2004), SAIC GM Wuling Automobile Co., Ltd (34% at June 30,
2005 and 2004); Korea - GM Daewoo (50.9% at June 30, 2005 and 44.6% at June 30,
2004) With the increase in ownership, GM Daewoo was consolidated by GM at June
30, 2005 - see Note 2; Italy - GM-Fiat Powertrain (FGP) (50% at March 31, 2004).
Information regarding GM's share of income for all nonconsolidated affiliates
in the following countries is included in the table below (in millions):
14
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 5. Investment in Nonconsolidated Affiliates (concluded)
GM's share of nonconsolidated affiliates' net income (loss):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Italy $11 $11 $32 $29
Japan $45 $53 $95 $159
China $99 $148 $132 $310
Korea $25 $15 $17 $7
On February 13, 2005, GM entered into certain agreements with Fiat, under
which GM and Fiat have terminated and liquidated all joint ventures between them
in existence at that time - see Note 2. Separately, during the second quarter of
2005, GM entered into a new joint venture with Fiat in Poland, GM Fiat
Powertrain Polska, with each party owning 50% of the joint venture.
NOTE 6. Product Warranty Liability
Policy, product warranty, and recall campaigns liability included the
following (dollars in millions):
Six Months Twelve Months Six Months
Ended Ended Ended
June 30, 2005 Dec. 31, 2004 June 30, 2004
------------- ------------- -------------
Beginning balance $9,315 $8,832 $8,832
Payments (2,366) (4,669) (2,290)
Increase in liability
(warranties issued during period) 2,867 5,065 2,794
Adjustments to liability (pre-existing
warranties) (264) (85) (157)
Effect of foreign currency translation
and other adjustments (263) 172 (23)
----- ----- -----
Ending balance $9,289 $9,315 $9,156
===== ===== =====
Warranty liability amounts in the table above have been revised to include
amounts with respect to certified-used vehicles. December 31 and June 30, 2004
balances have been revised accordingly to provide a comparative basis.
NOTE 7. Commitments and Contingent Matters
Commitments
GM has guarantees related to its performance under operating lease
arrangements and the residual value of lease assets totaling $639 million.
Expiration dates vary, and certain leases contain renewal options. The fair
value of the underlying assets is expected to fully mitigate GM's obligations
under these guarantees. Accordingly, no liabilities were recorded with respect
to such guarantees.
Also, GM has entered into agreements with certain suppliers and service
providers that guarantee the value of the suppliers' assets and agreements with
third parties that guarantee fulfillment of certain suppliers' commitments. The
maximum exposure under these commitments amounts to $154 million.
The Corporation has guaranteed certain amounts related to the securitization
of mortgage loans. In addition, GMAC issues financial standby letters of credit
as part of their financing and mortgage operations. At June 30, 2005
approximately $32 million was recorded with respect to these guarantees, the
maximum exposure under which is approximately $7.4 billion.
In addition to guarantees, GM has entered into agreements indemnifying
certain parties with respect to environmental conditions pertaining to ongoing
or sold GM properties. Due to the nature of the indemnifications, GM's maximum
exposure under these agreements cannot be estimated. No amounts have been
recorded for such indemnities.
15
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 7. Commitments and Contingent Matters (concluded)
In connection with the Delphi spinoff, completed May 28, 1999, GM has
provided limited guarantees with respect to benefits for former GM employees
relating to pensions, post-retirement healthcare, and life insurance. In
addition, GM has provided limited guarantees with respect to benefits for former
GM employees relating to pensions, post-retirement healthcare, and life
insurance in connection with certain other divestitures. Due to the nature of
these indemnities, the maximum exposure under these agreements cannot be
estimated. No amounts have been recorded for such indemnities as the
Corporation's obligations under them are not probable and estimable. Delphi has
given GM an indemnification with respect to all amounts for which GM may be
obligated under the guarantee obligation GM has with respect to employees of
Delphi.
In addition to the above, in the normal course of business GM periodically
enters into agreements that incorporate indemnification provisions. While the
maximum amount to which GM may be exposed under such agreements cannot be
estimated, it is the opinion of management that these guarantees and
indemnifications are not expected to have a material adverse effect on the
Corporation's consolidated financial position or results of operations.
Contingent Matters
Litigation is subject to uncertainties and the outcome of individual
litigated matters is not predictable with assurance. Various legal actions,
governmental investigations, claims, and proceedings are pending against the
Corporation, including those arising out of alleged product defects;
employment-related matters; governmental regulations relating to safety,
emissions, and fuel economy; product warranties; financial services; dealer,
supplier, and other contractual relationships; and environmental matters.
GM has established reserves for matters in which 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, environmental
remediation programs, or sanctions, that if granted, could require the
Corporation to pay damages or make other expenditures in amounts that could not
be estimated at June 30, 2005. After discussion with counsel, it is the opinion
of management that such liability is not expected to have a material adverse
effect on the Corporation's consolidated financial condition or results of
operations.
NOTE 8. Comprehensive Income (Loss)
GM's total comprehensive income (loss), net of tax, was as follows (in
millions):
Three Months Ended Six Months Ended
June 30, June 30
---------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Net income (loss) $(286) $1,377 $(1,390) $2,585
Other comprehensive income
(loss) 2 302 (729) 448
--- ----- ----- -----
Total $(284) $1,679 $(2,119) $3,033
=== ===== ===== =====
16
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 9. Earnings Per Share Attributable to Common Stock
The reconciliation of the amounts used in the basic and diluted earnings per
share computations was as follows (in millions except per share amounts):
$1-2/3 Par Value Common Stock
-------------------------------
Income Per Share
(Loss) Shares Amount
Three Months Ended June 30, 2005
Basic EPS
(Losses) attributable to common stock $(286) 565 $(0.51)
====
Effect of Dilutive Securities
Assumed exercise of dilutive stock options - - -
--- --- ----
Diluted EPS
Adjusted (losses) attributable to common
stock $(286) 565 $(0.51)
=== === ====
Three Months Ended June 30, 2004
Basic EPS
Earnings attributable to common stock $1,377 565 $2.44
====
Effect of Dilutive Securities
Assumed exercise of dilutive stock options - 3 -
----- --- ----
Diluted EPS
Adjusted earnings attributable to common
stock $1,377 568 $2.42
===== === ====
Six Months Ended June 30, 2005
Basic EPS
(Losses) attributable to common stock $(1,390) 565 $(2.46)
====
Effect of Dilutive Securities
Assumed exercise of dilutive stock options - - -
----- --- ----
Diluted EPS
Adjusted (losses) attributable to common
stock $(1,390) 565 $(2.46)
===== === ====
Six Months Ended June 30, 2004
Basic EPS
Earnings attributable to common stock $2,585 565 $4.58
====
Effect of Dilutive Securities
Assumed exercise of dilutive stock options - 4 -
----- --- ----
Diluted EPS
Adjusted earnings attributable to common
stock $2,585 569 $4.54
===== === ====
Certain stock options and convertible securities were not included in the
computation of diluted earnings per share for the periods presented since the
instruments' underlying exercise prices were greater than the average market
prices of GM $1-2/3 par value common stock and inclusion would be antidilutive.
Such shares not included in the computation of diluted earnings per share were
112 million as of June 30, 2005 and 223 million as of June 30, 2004. In
addition, for periods in which there was a loss attributable to common stocks,
options to purchase shares of GM $1-2/3 par value common stock with underlying
exercise prices less than the average market prices were outstanding, but were
excluded from the calculations of diluted loss per share, as inclusion of these
securities would have reduced the net loss per share.
17
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 10. Depreciation and Amortization
Depreciation and amortization included in cost of sales and other expenses
and selling, general and administrative expenses for Automotive and Other
Operations was as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Depreciation $1,292 $1,441 $2,562 $2,589
Amortization of special tools 803 774 1,619 1,500
Amortization of intangible
assets 13 9 23 16
----- ----- ----- -----
Total $2,108 $2,224 $4,204 $4,105
===== ===== ===== =====
NOTE 11. Pensions and Other Postretirement Benefits
U.S. Plans Non-U.S. Plans
Pension Benefits Pension Benefits Other Benefits
---------------------------------------------------
Three Months Three Months Three Months
Ended Ended Ended
June 30, June 30, June 30,
---------------------------------------------------
2005 2004 2005 2004 2005 2004
---------------------------------------------------
Components of expense (dollars in millions)
Service cost $274 $275 $70 $60 $188 $149
Interest cost 1,237 1,263 235 216 1,079 967
Expected return on plan
assets (1,974) (1,955) (182) (163) (421) (274)
Amortization of prior
service cost 291 319 26 23 (15) (20)
Recognized net actuarial
loss 479 464 69 47 586 278
Curtailments, settlements,
and other 21 - 25 1 2 -
--- --- --- --- ----- -----
Net expense $328 $366 $243 $184 $1,419 $1,100
=== === === === ===== =====
---------------------------------------------------
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
---------------------------------------------------
2005 2004 2005 2004 2005 2004
---------------------------------------------------
Components of expense (dollars in millions)
Service cost $548 $548 $142 $122 $376 $306
Interest cost 2,474 2,523 476 439 2,160 1,984
Expected return on plan
assets (3,948) (3,908) (367) (326) (842) (547)
Amortization of prior
service cost 582 638 53 47 (31) (40)
Recognized net actuarial
loss 958 928 138 95 1,172 652
Curtailments, settlements,
and other 112 34 84 8 2 -
--- --- --- --- ----- -----
Net expense $726 $763 $526 $385 $2,837 $2,355
=== === === === ===== =====
During the second quarter of 2005, GM withdrew $1 billion from its Voluntary
Employees' Beneficiary Association (VEBA) trust as a reimbursement for its
retiree health care payments. On July 1, 2005, GM withdrew an additional $1
billion from the VEBA, and on a quarter-by-quarter basis is evaluating the need
for additional withdrawals as the cost of health care continues to adversely
affect GM's liquidity.
NOTE 12. 2005 Initiatives
Results in the first quarter of 2005 include after-tax charges of $140 million
recorded in GMNA and $8 million recorded in Other Operations related to
voluntary early retirement and other separation programs with respect to certain
salaried employees in the U.S. GMNA results in the first quarter of 2005 include
a charge of $84 million, after tax, for the write-down to fair market value of
various plant assets in connection with the first quarter announcement to
discontinue production at the Lansing assembly plant during the second quarter
of 2005.
18
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 12. 2005 Initiatives (concluded)
GME results in the first and second quarters of 2005 include after-tax
separation charges of $422 million and $126 million, respectively, related to
the restructuring plan announced in the fourth quarter of 2004. This plan
targets a reduction in annual structural costs of an estimated $600 million by
2006. A total reduction of 12,000 employees, including 10,000 in Germany, over
the period 2005 through 2007 through separation programs, early retirements, and
selected outsourcing initiatives is expected. The charge incurred in the first
quarter of 2005 covers approximately 5,650 people, of whom 4,900 are in Germany.
The charge in the second quarter of 2005 covers approximately 600 additional
people, as well as those charges related to previous separations that are
required to be amortized over future periods, and costs related to the
dissolution of the FGP joint ventures.
19
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 13. Segment Reporting
Auto & Other Total
GMNA GME GMLAAM GMAP GMA Other Other GMAC Financing Financing
---- --- ------ ---- --- ----- ----- ---- --------- ---------
For the Three Months Ended (dollars in millions)
June 30, 2005
Manufactured products
sales and revenues:
External customers $28,038 $8,025 $2,742 $1,640 $40,445 $(267) $40,178 $8,319 $(28) $8,291
Intersegment (913) 438 193 282 - - - - - -
------ ----- ----- ----- ------ --- ------ ----- -- -----
Total manufactured products $27,125 $8,463 $2,935 $1,922 $40,445 $(267) $40,178 $8,319 $(28) $8,291
====== ===== ===== ===== ====== ==== ====== ===== == =====
Interest income (a) $318 $112 $10 $2 $442 $(252) $190 $432 $(70) $362
Interest expense $755 $132 $38 $9 $934 $(263) $671 $3,050 $(9) $3,041
Net income (loss) $(1,194) $(89) $33 $176 $(1,074) $(20) $(1,094) $816 $ (8) $808
Segment assets $124,188 $24,087 $4,876 $10,219 $163,370 $(3,600) $159,770 $309,991 $(317) $309,674
For the Three Months Ended
June 30, 2004
Manufactured products
sales and revenues:
External customers $29,988 $7,917 $1,764 $1,456 $41,125 $77 $41,202 $7,703 $349 $8,052
Intersegment (559) 177 145 237 - - - - - -
------ ----- ----- ----- ------ --- ------ ----- -- -----
Total manufactured products $29,429 $8,094 $1,909 $1,693 $41,125 $77 $41,202 $7,703 $349 $8,052
====== ===== ===== ===== ====== ==== ====== ===== == =====
Interest income (a) $212 $92 $(3) $4 $305 $(170) $135 $329 $(68) $261
Interest expense $655 $88 $16 $5 $764 $(168) $596 $2,253 $(10) $2,243
Net income (loss) $355 $(45) $10 $259 $579 $(34) $545 $846 $(14) $832
Segment assets $129,862 $24,829 $3,672 $3,925 $162,288 $(1,575) $160,713 $296,968 $(217) $296,751
For the Six Months Ended
June 30, 2005
Manufactured products
sales and revenues:
External customers $54,123 $15,598 $4,876 $3,175 $77,772 $(291) $77,481 $16,540 $ 221 $16,761
Intersegment (1,620) 822 358 441 1 (1) - - - -
------ ----- ----- ----- ------ --- ------ ------ -- -----
Total manufactured products $52,503 $16,420 $5,234 $3,616 $77,773 $(292) $77,481 $16,540 $221 $16,761
====== ===== ===== ===== ====== ==== ====== ====== == =====
Interest income (a) $614 $203 $29 $5 $851 $(452) $399 $909 $(164) $745
Interest expense $1,513 $243 $62 $16 $1,834 $(478) $1,356 $6,051 $(16) $6,035
Net income (loss) $(2,754) $(614) $79 $236 $(3,053) $126 $(2,927) $1,544 $(7) $1,537
For the Six Months Ended
June 30, 2004
Manufactured products
sales and revenues:
External customers $59,631 $15,195 $3,493 $2,884 $81,203 $136 $81,339 $15,273 $472 $15,745
Intersegment (1,099) 442 249 408 - - - - - -
------ ----- ----- ----- ------ --- ------ ------ --- ------
Total manufactured products $58,532 $15,637 $3,742 $3,292 $81,203 $136 $81,339 $15,273 $472 $15,745
====== ===== ===== ===== ====== ==== ====== ====== === ======
Interest income (a) $398 $173 $8 $6 $585 $(293) $292 $662 $(137) $525
Interest expense $1,294 $175 $10 $12 $1,491 $(333) $1,158 $4,476 $(11) $4,465
Net income (loss) $756 $(161) $11 $534 $1,140 $(151) $989 $1,610 $(14) $1,596
------------------------------------
(a) Interest income is included in net sales and revenues from external
customers.
20
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - concluded
(Unaudited)
Note 14. Subsequent Event
On August 3, 2005, GMAC announced that it had entered into a definitive
binding agreement to sell a 60% equity interest in GMAC Commercial Holding Corp.
(GMAC Commercial Mortgage). The transaction will allow GMAC Commercial Mortgage
increased access to capital for continued growth of its business and GMAC to
retain a significant economic interest. The transaction closing is contingent
upon GMAC Commercial Mortgage securing an investment grade senior debt rating by
Standard & Poor's, Moody's, and Fitch. It is expected that the transaction will
be completed during the fourth quarter of 2005, subject to all necessary
conditions and approvals.
21
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with the December 31,
2004 consolidated financial statements and notes thereto (the 2004 Consolidated
Financial Statements), along with the MD&A included in General Motors
Corporation's (the Corporation, General Motors, or GM) 2004 Annual Report on
Form 10-K, as well as General Motors Acceptance Corporation's (GMAC) Annual
Report on Form 10-K for the period ended December 31, 2004 and the Quarterly
Report on Form 10-Q for the period ended June 30, 2005, filed separately with
the U.S. Securities and Exchange Commission (SEC). All earnings per share
amounts included in the MD&A are reported on a fully diluted basis.
GM presents separate supplemental financial information for its reportable
operating segments:
o Automotive and Other Operations (Auto & Other); and
o Financing and Insurance Operations (FIO).
GM's Auto & Other reportable operating segment consists of:
o GM's four automotive regions: GM North America (GMNA), GM Europe (GME),
GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP),
which constitute GM Automotive (GMA); and
o Other, which includes the elimination of intersegment transactions,
certain non-segment specific revenues and expenditures, including
egacy costs related to postretirement benefits for certain Delphi and
other retirees, and certain corporate activities.
GM's FIO reportable operating segment consists of GMAC and Other Financing,
which includes financing entities that are not consolidated by GMAC.
The disaggregated financial results for GMA have been prepared using a
management approach, which is consistent with the basis and manner in which GM
management internally disaggregates financial information for the purpose of
assisting in making internal operating decisions. In this regard, certain common
expenses were allocated among regions less precisely than would be required for
stand-alone financial information prepared in accordance with accounting
principles generally accepted in the U.S. (GAAP). The financial results
represent the historical information used by management for internal
decision-making purposes; therefore, other data prepared to represent the way in
which the business will operate in the future, or data prepared in accordance
with GAAP, may be materially different.
Consistent with industry practice, market share information employs estimates
of sales in certain countries where public reporting is not legally required or
otherwise available on a consistent basis.
The accompanying MD&A gives effect to the restatement of the 2004 Quarterly
Consolidated Financial Statements discussed in Note 1 to the Consolidated
Financial Statements.
22
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
Consolidated Results Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
Restated Restated
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions)
Consolidated:
Total net sales and revenues $48,469 $49,254 $94,242 $97,084
Net income (loss) $(286) $1,377 $(1,390) $2,585
Net margin (0.6%) 2.8% (1.5%) 2.7%
Automotive and Other Operations:
Total net sales and revenues $40,178 $41,202 $77,481 $81,339
Net income (loss) $(1,094) $545 $(2,927) $989
Financing and Insurance Operations:
Total revenues $8,291 $8,052 $16,761 $15,745
Net income $808 $832 $1,537 $1,596
The decrease in second quarter 2005 total net sales and revenues, compared
with second quarter 2004, was due to decreased GMA revenue of $680 million,
primarily driven by lower production volume and unfavorable product mix at GMNA,
partly offset by revenue increases in all other automotive regions. FIO revenue
increased $239 million.
Consolidated net income decreased $1.7 billion to a net loss of $286 million
in the second quarter of 2005, compared to income of $1.4 billion in the second
quarter of 2004. The net loss at Auto & Other of $1.1 billion is primarily
attributable to GMNA, which had a net loss of $1.2 billion, and GME, which had a
net loss of $89 million, partially offset by net income at GMLAAM and GMAP. GMAC
earned $816 million in the second quarter of 2005, down $30 million from the
2004 level, reflecting lower financing income partially offset by higher income
from mortgage and insurance operations.
For the six months ended June 30, 2005, GM incurred a net loss of $1.4
billion, compared with net income of $2.6 billion in 2004. A significant loss at
GMNA, primarily due to lower production volume, weaker product mix, material
cost pressure, and higher healthcare costs, is the primary reason for the
overall net loss for the first half of the year.
On a consolidated basis, GM recognized a net tax benefit of $305 million on a
loss before taxes, equity income, and minority interests of $764 million,
resulting in an effective tax rate for the second quarter of 2005 of 40%. For
2005, GM expects to recognize substantial permanent tax benefits that do not
vary with pre-tax income, such as Medicare Part D benefits in the U.S. For the
second quarter of 2005, GM's income tax provision was based on the total of
pre-tax income at statutory tax rates plus one-fourth of these expected
benefits. Taxes were allocated to GM's automotive regions based on tax rates
used by management for evaluating their performance. Tax benefits in excess of
those recognized in GMA are allocated to Other Operations. GM's quarterly tax
provisions for the remainder of 2005 will be consistent with this approach.
Second quarter 2005 results, compared to second quarter 2004, included:
o Global automotive market share increased 0.5 percentage point to 15.2%;
o GMNA incurred a significant loss due to lower volumes, unfavorable mix,
material cost pressure, and increased health-care expense;
o GME achieved improved operating results, which were more than offset by a
restructuring charge related to ongoing initiatives;
o GMLAAM was profitable for the sixth consecutive quarter;
o GMAP earned lower net income resulting from conditions in China and lower
income at GM Holden; and
o GMAC earned significant net income despite a lower net interest margin
environment.
23
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GM Automotive and Other Operations Financial Review
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
Restated Restated
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions)
Auto & Other:
Total net sales and revenues $40,178 $41,202 $77,481 $81,339
Net income (loss) $(1,094) $545 $(2,927) $989
GMA net income (loss) by region:
GMNA $(1,194) $355 $(2,754) $756
GME (89) (45) (614) (161)
GMLAAM 33 10 79 11
GMAP 176 259 236 534
------ --- ------ ------
Net income (loss) $(1,074) $579 $(3,053) $1,140
Net margin (2.7%) 1.4% (3.9%) 1.4%
GM global automotive market share 15.2% 14.7% 14.3% 14.1%
Other:
Net income (loss) $(20) $(34) $126 $(151)
GM Auto & Other net sales and revenues declined $1.0 billion, or 2.5%, in the
second quarter of 2005, compared to the year-earlier quarter. The decrease was
more than accounted for by a 7.8% decline in GMNA's total revenues, while all
other regions increased revenues over the second quarter of 2004. GM's global
market share was 15.2% and 14.7% for the second quarters of 2005 and 2004,
respectively. GMNA's market share increased 1.1 percentage points, to 27.3% for
the quarter, compared to 2004. Market share gains were achieved in GMLAAM and
GMAP, while GME's share remained unchanged despite an increase in sales volume.
See discussion below under each region.
GMA incurred a net loss of $1.1 billion in the second quarter 2005, compared
to net income of $579 million in 2004, primarily due to a substantial loss at
GMNA and a restructuring charge at GME.
For the six months ended June 30, 2005, GMA total net sales and revenues
decreased $3.4 billion over the year-earlier period, with a decrease in GMNA of
$6.0 billion more than offsetting increases in all other automotive regions.
Over the same period, GMA incurred a net loss of $3.1 billion, compared to net
income of $1.1 billion in 2004, primarily resulting from a loss of $2.8 billion
at GMNA in 2005 and restructuring charges at GME.
Other Operations incurred losses of $20 million and $34 million in the second
quarters of 2005 and 2004, respectively, and earned net income of $126 million
for the first six months of 2005, compared to a net loss of $151 million for the
year-earlier period. The improved performance in 2005 was primarily due to tax
benefits allocated to Other Operations, partly offset by interest expense and
legacy costs.
24
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GM Automotive and Other Operations Financial Review (continued)
GM Automotive Regional Results
GM North America Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
Restated Restated
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions)
GMNA:
Net income (loss) $(1,194) $355 $(2,754) $756
Net margin (4.4%) 1.2% (5.2%) 1.3%
Production volume (volume in thousands)
Cars 458 543 928 1,068
Trucks 789 846 1,502 1,666
----- ----- ----- -----
Total GMNA 1,247 1,389 2,430 2,734
Vehicle unit sales
Industry - North America 5,631 5,393 10,318 10,068
GM as a percentage of industry 27.3% 26.2% 26.4% 26.3%
Industry - U.S. 4,801 4,598 8,801 8,592
GM as a percentage of industry 27.9% 26.7% 26.7% 26.7%
GM cars 23.5% 23.5% 23.4% 24.6%
GM trucks 31.3% 29.4% 29.4% 28.4%
North American industry vehicle unit sales increased to 5.6 million in the
second quarter of 2005 compared to 5.4 million in 2004, and GMNA's market share
increased 1.1 percentage points to 27.3% from 26.2% in the second quarter of
2004. Over this period U.S. industry sales increased 4.4% to 4.8 million units.
GM's U.S. market share increased by 1.2 percentage points, to 27.9%, compared to
the second quarter of 2004. U.S. car market share remained unchanged at 23.5%,
while U.S. truck market share increased to 31.3%, up 1.9 percentage points.
Increased volume of new models and successful marketing programs, in particular
employee pricing offers, were primary drivers of the increased retail sales in
the 2005 period.
In the second quarter of 2005, GMNA recorded a net loss of $1.2 billion, a
deterioration of $1.5 billion from 2004 net income of $355 million. The decrease
was primarily due to lower production volume, higher health-care expense,
unfavorable product mix, and unfavorable material costs. Production volume was
lower in 2005 by 142 thousand units, at 1.247 million for the quarter, compared
to 1.389 million in the second quarter of 2004. Dealer inventories in the U.S.
declined by 349 thousand units as a result of decreased production and strong
retail sales in the quarter, to 1.018 million at June 30, 2005, from 1.367
million units at June 30, 2004. Product mix was unfavorable primarily due to a
decrease in sales of large utility vehicles, resulting from the need to reduce
dealer inventory levels in light of the upcoming launch of the GMT 900 full-size
sport utility vehicle later this year. In addition, GMNA produced more fleet
vehicles (28.4% of production in the second quarter of 2005, compared to 25.1%
in the second quarter of 2004) that are less profitable than retail units.
Country of sale mix, with higher sales in Canada and Mexico, and model mix were
unfavorable, as well. In the second quarter of 2005, GMNA completed its annual
study of warranty reserves. This resulted in a favorable pretax adjustment of
$237 million, compared to $138 million in the second quarter of 2004 ($147
million and $86 million after tax, respectively).
North American industry vehicle unit sales increased 2.5% to 10.3 million in
the first six months of 2005 from 10.1 million in the first six months of 2004,
while GMNA's market share increased by 0.1 percentage point to 26.4% in 2005
year-to-date, compared to 26.3% in 2004.
For the first six months of 2005, industry vehicle unit sales in the United
States increased 2.4% to 8.8 million units from 8.6 million units in the
year-earlier period. GM's 2005 year-to-date U.S. market share remained
unchanged, at 26.7%. U.S. car market share declined by 1.2 percentage points to
23.4%, while U.S. truck market share increased to 29.4%, up 1.0 percentage point
from 2004.
25
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GM Automotive and Other Operations Financial Review (continued)
GM Automotive Regional Results (concluded)
For the first six months of 2005 GMNA incurred a net loss of $2.8 billion,
compared to net income of $756 million in 2004, primarily due to lower
production volume, higher health-care expense, and unfavorable product mix. In
addition, results in the first half of 2005 included an after-tax charge of $140
million related to voluntary early retirement and other separation programs with
respect to certain salaried employees in the U.S. The first half of 2005 also
included a charge of $84 million, after tax, for the write-down to fair market
value of various plant assets in connection with the cessation of production at
the Lansing assembly plant during the second quarter of 2005.
Vehicle revenue per unit was $18,811 for the second quarter of 2005, slightly
higher compared to $18,801 for the second quarter of 2004.
GM North America Recovery Plan
GM has announced plans to improve results at GMNA. The key elements of these
plans and actions to date are as follows:
- Execution of new products:
o Increasing capital spending by approximately $1 billion in 2005,
concentrated on new products;
o Advancing the timing of several high volume, high profit programs,
including large pick-ups and mid- and large-utilities;
o Achieving strong sales of recently launched products, such as the Cobalt
and H3, and
o Launching additional products in the near term, including the
Chevrolet HHR, Pontiac Solstice, and Cadillac DTS.
- Retool sales and marketing strategy:
o Clarifying, focusing, and differentiating the role of each North
American brand;
o Increasing advertising to support new products;
o Implementing pricing and/or content changes on approximately half of
2006 model year products, emphasizing total value to customers, and
decreasing reliance on sales incentives;
o Focusing on improving GM's sales performance in major metropolitan
markets; and
o Improving the retail distribution network.
- Reduce cost and improve quality:
o Continuing the improvements in quality and productivity that have been
recognized in recent surveys by J.D. Power and the Harbour Report;
o Continuing to implement capacity reductions; and
o Continuing efforts to reduce material costs through global sourcing
efforts.
- Address health care cost burden:
o GM is engaged in discussions with the UAW and other unions, focused on a
cooperative approach to significantly reduce GM's health care cost
disadvantage.
Delphi Matters
Delphi Corporation, a major supplier to GM's automotive operations and a
former subsidiary of GM, has presented GM with information regarding its
intention to address its existing legacy liabilities and the high cost
structure of its U.S. operations. Delphi has stated that it has also outlined
this information to its largest union, the International Union, United
Automobile, Aerospace and Agricultural Implement Workers of America (UAW), and
separately to its other U.S. unions. Delphi has stated that it is seeking a
comprehensive restructuring of its U.S. operations in which it obtains
participation by its unions and financial support from GM. Delphi has also
stated that, if it is not successful in achieving a restructuring by October 17,
2005, it would consider other strategic alternatives, including a judicial
reorganization under Federal bankruptcy laws. GM is considering Delphi's
request in order to determine what participation by GM, if any, would be
in the best interests of GM and its stockholders. Delphi has notified
GM that, assuming GM participates in Delphi's restructuring in a manner
satisfactory to Delphi, it is Delphi's view there is not a likelihood that GM
would become obligated to provide any benefits pursuant to the benefit guarantee
agreement GM entered into with certain of its unions in 1999 (see Note 7 to the
Consolidated Financial Statements), but has indicated that without GM's
financial participation in Delphi's restructuring proposal, it expects that its
view as to that matter would change.
26
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GM Automotive and Other Operations Financial Review (continued)
GM Europe Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
Restated Restated
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions)
GME net loss $(89) $(45) $(614) $(161)
GME net margin (1.1%) (0.6%) (3.7%) (1.0%)
(volume in thousands)
Production volume 501 503 1,003 976
Vehicle unit sales
Industry 5,673 5,576 10,945 10,929
GM as a percentage of industry 9.7% 9.7% 9.7% 9.5%
GM market share - Germany 11.1% 10.8% 11.0% 10.7%
GM market share - United Kingdom 15.5% 13.9% 15.2% 14.0%
Industry vehicle unit sales increased in Europe during the second quarter of
2005 by 1.7% to 5.7 million, from 5.6 million in the second quarter of 2004,
with strong year-over-year growth in most of the region, partly offset by
declines in the U.K., Italy, and Central Europe. In line with higher industry
volumes, GME's vehicle unit sales increased by 10 thousand units over the second
quarter of 2004, to 549 thousand units. GME's market share remained unchanged at
9.7%. In GM's two largest markets in Europe, GM gained market share: share was
11.1% in Germany, a 0.3 percentage point increase versus the second quarter of
2004, and 15.5% in the United Kingdom, an increase of 1.6 percentage points
versus the same period in 2004. Market share was mixed in the rest of the
region, with improvements in Italy and Eastern Europe, and declines in France,
Spain, and other markets.
Net loss for GME totaled $89 million and $45 million in the second quarters
of 2005 and 2004, respectively. The second quarter 2005 loss includes an
after-tax restructuring charge of $126 million, related to the initiative
announced in the fourth quarter of 2004 and costs of dissolving GM's powertrain
and purchasing joint ventures with Fiat S.p.A (Fiat). This charge and continued
unfavorable price pressure more than offset improvements in structural costs
(including the initial effects of the restructuring initiative), favorable
material costs, and the effects of positive product mix.
For the first six months of 2005, industry unit sales were essentially
unchanged from the 2004 period in Europe, at 10.9 million units. GM's market
share in the region increased 0.2 percentage point in the first half of 2005, to
9.7%. GM's share improved in both the U.K., up 1.2 percentage points to 15.2%,
and in Germany, up 0.3 percentage point to 11.0%, compared to the first six
months of 2004.
For the six months ended June 30, 2005, GME's net loss was $614 million,
compared to $161 million for the same period in 2004. The increased loss was
more than accounted for by after-tax restructuring charges totaling $548 million
(including $422 million in the first quarter). These charges and unfavorable
price more than offset favorable mix and material and structural cost
improvements.
The restructuring plan noted above targets a reduction in annual structural
costs of an estimated $600 million by 2006. A total reduction of 12,000
employees, including 10,000 in Germany, over the period 2005 through 2007
through separation programs, early retirements, and selected outsourcing
initiatives is expected. The charge incurred in the second quarter of 2005
covers approximately 600 people, as well as those charges related to previous
separations that are required to be amortized over future periods. The charge
incurred in the first quarter of 2005 covered approximately 5,650 people, of
whom 4,900 are in Germany. The Corporation's plan is on track and anticipates
further separations and associated charges in the remainder of 2005 and into
2006 and 2007. The amount of such future separation charges will be recognized
in the respective periods, and will depend both on the type of separations and
associated workforce demographics.
27
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GM Latin America/Africa/Mid-East Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
Restated Restated
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions)
GMLAAM net income $33 $10 $79 $11
GMLAAM net margin 1.1% 0.5% 1.5% 0.3%
(volume in thousands)
Production volume 196 172 381 331
Vehicle unit sales
Industry 1,237 1,020 2,381 2,004
GM as a percentage of industry 18.3% 17.1% 17.2% 16.6%
GM market share - Brazil 21.9% 23.5% 20.6% 23.5%
Industry vehicle unit sales in the LAAM region increased over 21% in the
second quarter of 2005, to 1.237 million units, compared to the second quarter
of 2004. Overall, GMLAAM's market share for the region increased 1.2 percentage
points, to 18.3% in the second quarter of 2005. This increase was primarily the
result of a 3.4 percentage point increase in South Africa market share, and
increases in Argentina and the Middle East, partly offset by a decrease of 1.6
percentage points in Brazil. GM's market share in Brazil was adversely affected
by the lack of a 1.0 liter flex-fuel vehicle in the low market segment. This
will be addressed in the third quarter of 2005 with the launch of the Chevrolet
Celta with flex-fuel.
GMLAAM earned net income of $33 million in the quarter, up from net income of
$10 million in the second quarter of 2004. The increase in net income was
primarily the result of higher production volume, partly offset by negative
foreign exchange, especially in Brazil. The second quarter of 2005 is the sixth
consecutive quarter of profitability for GMLAAM.
In the first half of 2005, industry vehicle unit sales grew to 2.381 million
units, up 18.8% over the first half of 2004. GM's market share in the region
increased to 17.2%, from 16.6% in 2004, despite a decrease in share in Brazil,
down 2.9 percentage points to 20.6%.
For the first half of 2005, GMLAAM earned $79 million, compared to $11
million a year earlier, primarily due to higher income in South Africa,
Venezuela, and Colombia, partially offset by unfavorable results in Brazil.
GM Asia Pacific Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
Restated Restated
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions)
GMAP net income $176 $259 $236 $534
GMAP net margin 9.2% 15.3% 6.5% 16.2%
(volume in thousands)
Production volume 400 337 735 633
Vehicle unit sales
Industry 4,500 4,048 9,142 8,620
GM as a percentage of industry 6.3% 5.6% 5.6% 5.2%
GM market share - Australia 18.0% 19.3% 18.2% 19.7%
GM market share - China 11.4% 9.8% 10.9% 9.8%
28
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GM Automotive and Other Operations Financial Review (concluded)
GM Asis Pacific (concluded)
Industry vehicle unit sales in the Asia Pacific region increased 11.2% in the
second quarter of 2005 compared to the second quarter of 2004, to 4.5 million
units, with slightly over half the unit increase in China, and growth throughout
the region. GMAP increased its vehicle unit sales (including GM Daewoo Auto &
Technology Company [GM Daewoo] and China affiliates) in the region by 55
thousand units, or 24.7% in the period, to 281 thousand units from 226 thousand
in 2004, driven primarily by higher sales in China. GMAP's second quarter 2005
market share increased to 6.3%, from 5.6% in the second quarter of 2004. GMAP
increased its market share in China to 11.4% in the second quarter of 2005, up
from 9.8% in the second quarter of 2004. Market share in Australia decreased in
the period to 18.0%, compared to 19.3% in the second quarter of 2004, primarily
due to lower sales of full-sized cars.
In the first six months of 2005, industry vehicle unit sales in the region
increased 522 thousand units, or 6.1%, to 9.1 million, over the year earlier
period, while GMAP's sales increased 63 thousand units, or 13.9%, to 513
thousand. The bulk of GMAP's growth, 49 thousand units, was in China, where
market share grew 1.1 percentage points to 10.9% for the first half of 2005.
Overall in the region, GMAP's market share increased 0.4 percentage point, to
5.6%, in the period, compared to 2004.
Net income from GMAP was $176 million and $259 million in the second quarters
of 2005 and 2004, respectively. For the six-month periods ending June 30, 2005
and 2004, GMAP's net income was $236 million and $534 million, respectively. The
decrease in income was primarily due to lower equity earnings from Shanghai GM,
largely due to unfavorable product mix and unfavorable price. In addition, GM
Holden's 2005 results have been lower than in 2004 due to reduced sales of
locally produced vehicles and the unfavorable effect of the failure ION, a local
supplier.
On June 28, 2005 GM increased its ownership in GM Daewoo to 50.9% from 48.2%.
Accordingly, as of June 30, 2005, GM Daewoo was consolidated by GM. See Note 2
to the Consolidated Financial Statements.
Other Operations Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions)
Other:
Total net sales, revenues, and
eliminations $(267) $77 $(292) $136
Net income (loss) $(20) $(34) $126 $(151)
Other Operations incurred net losses of $20 million and $34 million in the
second quarters of 2005 and 2004, respectively. Results for 2005 include tax
benefits of $158 million recognized in Other Operations. As discussed above,
these benefits relate to various items that generally do not vary with changes
in pre-tax income. These benefits were partially offset by legacy costs,
interest expense, and exchange. Other Operations' results include after-tax
legacy costs of $129 million and $102 million for the second quarters of 2005
and 2004, respectively, related to employee benefit costs of divested
businesses, primarily Delphi, for which GM has retained responsibility.
For the first half of 2005, Other Operations earned net income of $126
million, compared to a net loss of $151 million in the 2004 period. The
improvement is attributable to tax benefits, as discussed above, of $547 million
allocated to Other Operations in 2005, partially reduced by increases in legacy
costs, interest expense, and exchange. Legacy costs of $241 million and $204
million were included in Other Operations' results for 2005 and 2004,
respectively. Other Operations' results for the first half of 2005 also include
$8 million, after tax, related to the early retirement and other separation
programs, in the first quarter, described above for certain salaried employees
in the U.S.
29
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Health-Care Costs
GM is currently exposed to significant and growing liabilities for other
postretirement employee benefits (OPEB), including retiree health care and life
insurance, for both its hourly and salaried workforces. GM discontinued offering
OPEB to salaried workers hired after 1992. Such employees now comprise
approximately 30% of GM's U.S. active salaried workforce. GM's OPEB liabilities
have grown to $77.5 billion as of December 31, 2004 with increases in recent
years primarily resulting from increases in health-care inflation. GM's OPEB
liabilities affect GM's short-term and long-term financial condition in several
ways. GM's OPEB liabilities affect GM's OPEB expense, which affects GM's net
income. GM's pre-tax OPEB expense is expected to grow to an estimated $5.7
billion in 2005, up $1.1 billion from 2004, primarily as a result of rising
retiree health-care costs and falling discount rates. GM's total pre-tax
health-care expense for 2005 is estimated to be $7.4 billion. This cost increase
has challenged GM's ability to reduce its structural costs.
In recent years, GM has paid its OPEB expenditures from operating cash flow,
which reduces GM's liquidity and cash flow from operations. GM's OPEB spending
is expected to be $4.2 billion in 2005, up $0.4 billion from 2004. GM's total
cash spending for healthcare in 2005 is estimated to be $5.8 billion, also up
approximately $0.4 billion from 2004 spending levels. However, GM has Voluntary
Employees' Beneficiary Association (VEBA) and 401(h) trusts totaling $20.4
billion as of June 30, 2005 that could be used to reimburse GM for its OPEB
expenditures under certain circumstances. During the second quarter of 2005, GM
withdrew $1 billion from its VEBA trust as a reimbursement for its retiree
health care payments. On July 1, 2005, GM withdrew an additional $1 billion from
the VEBA, and on a quarter-by-quarter basis is evaluating the need for
additional withdrawals as the cost of health care continues to adversely
affect GM's liquidity. GM's OPEB liabilities also negatively affect GM's credit
ratings, which are discussed at "Status of Debt Ratings" below.
Because of the importance of OPEB liabilities to GM's financial condition, GM
management is pursuing an aggressive strategy on several fronts to mitigate the
continued growth of these liabilities. These efforts include public policy
initiatives, improvements to the health-care delivery system, enhanced consumer
awareness of the effect of health-care choices and on-going discussions with our
labor unions about the level of OPEB benefits provided to hourly employees.
GMAC Financial Review
GMAC's net income was $816 million and $846 million in the second quarters of
2005 and 2004, respectively. Net income for the first six months of 2005 and
2004 was $1.5 billion and $1.6 billion, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------
Restated Restated
2005 2004 2005 2004
---- ---- ---- ----
(dollars in millions)
Financing operations $378 $452 $626 $894
Mortgage operations 338 319 723 550
Insurance operations 100 75 195 166
--- --- ----- -----
Net income $816 $846 $1,544 $1,610
=== === ===== =====
Net income from financing operations totaled $378 million in the second
quarter of 2005, as compared with $452 million earned in the same period of the
prior year. For the first six months of 2005 and 2004, financing operations' net
income was $626 million and $894 million, respectively. The decrease for the
2005 periods reflects the unfavorable effect of lower net interest margins as a
result of increased borrowing costs. The decline in net interest margins was
somewhat mitigated by the effect of improved used vehicle prices on lease
terminations and lower credit loss provisions in 2005, compared to 2004.
Mortgage operations earned $338 million in the second quarter of 2005, up
from $319 million in the second quarter of 2004. For the first six months of
2005, mortgage operations' net income was $723 million, compared to $550 million
in 2004. These results represent increases of 6% and 31% over the same periods
of 2004, despite lower overall U.S. mortgage industry volume in 2005 as compared
to 2004. On a combined basis, loan production for GMAC's residential based
mortgage companies for the second quarter of 2005 remained consistent with that
experienced for the second quarter of 2004, despite a decline of approximately
11% in total U.S. residential mortgage industry volume during the same time
period. In addition, the favorable effects of valuation gains on the investment
30
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMAC Financial Review (concluded)
portfolio and favorable mortgage servicing results mitigated the impact of lower
gains on sales of loans and lower net interest margins due to increased
borrowing costs. GMAC's commercial mortgage operations' earnings were down $5
million from the second quarter of 2004, primarily due to lower gains on sales
of loans as a result of certain valuation adjustments, which occurred during the
quarter. However, as a result of increased volume and higher gains on sales in
the first quarter of 2005, net income for the first six months of 2005 increased
by $25 million to $101 million as compared to the first six months of 2004.
Net income from insurance operations totaled $100 million and $75 million for
the second quarter of 2005 and 2004, respectively, and $195 million and $166
million for the first six months of 2005 and 2004, respectively. The increases
in 2005 are primarily the result of favorable underwriting results due to
increases in insurance premiums and service revenue earned and written from
contract growth across the majority of product lines. In addition, incurred
losses attributable to severe weather in the United States were lower in the
second quarter of 2005 than in the second quarter of 2004.
2005 Priorities / Targets
With respect to GM's and GMNA's earnings for the remainder of 2005, GM has
determined not to provide a forecast at this time due to the uncertainty
affecting key elements of its outlook, such as a resolution of the current
health-care cost issues facing GM. GME, GMLAAM, GMAP and GMAC are expected to
meet or exceed their net income targets of $(500) million, $100 million, $600
million, and $2,500 million or more, respectively, for 2005.
LIQUIDITY AND CAPITAL RESOURCES
Statements of Cash Flows Reclassifications
After considering the concerns raised by the staff of the SEC as of December
31, 2004, management concluded that certain amounts in the Consolidated
Statements of Cash Flows for the year ended December 31, 2004 should be
reclassified to appropriately present net cash provided by operating activities
and net cash used in investing activities. These amounts have been reclassified
consistently as of June 30, 2004.
The Corporation's previous policy was to classify all the cash flow effects
of providing wholesale loans to its independent dealers by GM's Financing and
Insurance Operations as an investing activity in its Consolidated Statements of
Cash Flows. This policy, when applied to the financing of inventory sales, had
the effect of presenting an investing cash outflow and an operating cash inflow
even though there was no cash inflow or outflow on a consolidated basis. The
Corporation has changed its policy to eliminate this intersegment activity from
its Consolidated Statements of Cash Flows and, as a result of this change, all
cash flow effects related to wholesale loans are reflected in the operating
activities section of the Consolidated Statement of Cash Flows for the six
months ended June 30, 2004. This reclassification better reflects the financing
of the sale of inventory as a non-cash transaction to GM on a consolidated basis
and eliminates the effects of intercompany transactions. See Note 1 to the
Consolidated Financial Statements for the effect of this reclassification.
Status of Debt Ratings
In the second quarter of 2005, GM and GMAC experienced adequate access to
secured funding sources and limited access to the unsecured capital markets.
Nonetheless, GM and GMAC were able to meet their respective capital requirements
due to their diversified funding strategies and liquidity positions. On April 5,
2005, Moody's downgraded GM's long-term credit rating from Baa2 with a negative
outlook to Baa3 with a negative outlook and, at the same time, downgraded GMAC's
long-term credit rating from Baa1 with a negative outlook to Baa2 with a
negative outlook. Moody's lowered GM's commercial paper rating to Prime-3 with a
negative outlook from Prime-2 with a negative outlook and, at the same time,
affirmed GMAC's commercial paper rating of Prime-2 with a negative outlook. On
July 7, 2005, Moody's placed the ratings of GM and GMAC on review for possible
downgrade. On May 5, 2005, Standard & Poor's downgraded GM's and GMAC's
long-term credit rating from BBB- with a negative outlook to BB with a negative
outlook and, at the same time, downgraded GM's and GMAC's commercial paper
rating from A-3 with a negative outlook to B-1 with a negative outlook. On May
24, 2005, Fitch downgraded GM's and GMAC's long-term credit rating from BBB-
with a negative outlook to BB+ with a negative outlook and, at the same time,
downgraded GM's and GMAC's commercial paper rating from F3 with a negative
outlook to B with a negative outlook. On May 26, 2005, DBRS downgraded GM's
long-term rating from BBB with a negative outlook to BBB (low) with a negative
31
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (continued)
Status of Debt Ratings (continued)
outlook and, at the same time, downgraded GMAC's long-term credit rating of BBB
(high) negative to BBB with a negative outlook. DBRS downgraded GM's commercial
paper rating from R-2 (high) with a negative outlook to R-2 (low) with a
negative outlook and, at the same time, lowered the outlook on GMAC's commercial
paper rating of R-1 (low) with a negative outlook to R-2 (mid) with a negative
outlook. On August 2, 2005, DBRS downgraded GM's long-term rating from BBB (low)
with a negative outlook to BB (high) with a negative outlook and, at the same
time, downgraded GMAC's long-term credit rating of BBB with a negative outlook
to BBB (low) with a negative outlook. DBRS downgraded GM's commercial paper
rating from R-2 (low) with a negative outlook to R-3 (high) with a negative
outlook and, at the same time, lowered the rating on GMAC's commercial paper
from R-2 (mid) with a negative outlook to R-2 (low) with a negative outlook.
Refer to the table below for a summary of GM's and GMAC's credit ratings
subsequent to these rating actions.
Standard & Poor's, Fitch, and DBRS rate GM's credit at non-investment grade,
with both Standard & Poor's and Fitch also rating GMAC's credit non-investment
grade. While this has resulted in increased borrowing costs and limited access
to unsecured debt markets, including capital markets for retail debt, these
outcomes have been mitigated by actions taken by GM and GMAC over the past few
years to focus on an increased use of liquidity sources other than institutional
unsecured markets that are not directly affected by ratings on unsecured debt,
including secured funding sources beyond traditional asset classes and
geographical markets, automotive whole loan sales, and use of bank and conduit
facilities. Further reductions of GM's and/or GMAC's credit ratings could
increase the possibility of additional terms and conditions contained in
any new or replacement financing arrangements. The reduction of GM's and GMAC's
credit ratings to non-investment grade is not expected to have a material effect
on GM's and GMAC's access to adequate capital to meet the Corporation's funding
needs in the short and medium term.
Notwithstanding the foregoing, management believes that the current ratings
situation and outlook increase the level of risk for achieving the Corporation's
funding strategy and GMAC's ability to sustain current level of asset
originations over the long term. In addition, the ratings situation and outlook
increase the importance of successfully executing the Corporation's plans for
improvement of operating results. Management continuously assesses these matters
and is seeking to mitigate the increased risk by exploring whether actions could
be taken that would provide a basis for rating agencies to evaluate GMAC's
financial performance in order to provide GMAC with ratings independent of those
assigned to GM. Currently, only Moody's and DBRS assign a different credit
rating to GMAC than they do to GM. There can be no assurance that any such
actions would be taken or that such actions, if taken, would be successful in
achieving a "split" rating from other rating agencies.
Status of Debt Ratings (concluded)
---------------------------------------------------------------
GM GMAC GM GMAC GM GMAC
---------------------------------------------------------------
Rating Agency Senior Debt Commercial Paper Outlook
------------- ---------------------------------------------------------------
R-3
DBRS BB (high) BBB (low) (high) R-2(low) Negative Negative
Fitch BB+ BB+ B B Negative Negative
Moody's Baa3 Baa2 Prime-3 Prime-2 Negative Negative
S&P BB BB B-1 B-1 Negative Negative
As an additional source of funds, GM currently has unrestricted access to a
$5.6 billion line of credit with a syndicate of banks that is committed through
June 2008. GM also has an additional $0.9 billion in undrawn committed
facilities with various maturities and undrawn uncommitted lines of credit of
$1.2 billion. Similarly, GMAC currently has a $3.0 billion syndicated line of
credit committed through June 2006, $4.4 billion committed through June 2008,
and committed and uncommitted bilateral lines of credit of $3.5 and $13.4
billion, respectively. In addition, New Center Asset Trust (NCAT) has an $18.5
billion committed liquidity facility. NCAT is a special purpose entity
administered by GMAC for the purpose of funding assets as part of GMAC's
securitization programs. This entity funds the purchase of assets through
the issuance of asset-backed commercial paper and represents an important
source of liquidity to GMAC. At June 30, 2005, NCAT had commercial paper
outstanding of $8.0 billion, which is not consolidated in the Corporation's
Consolidated Balance Sheet. In addition, MAC enters into secured funding
facilities whereby, in certain facilities, third parties (including
third-party asset-backed commercial paper conduits) have committed to purchase
a minimum amount of receivables through a designated period of time. The
unused portion of the committed and uncommitted facilities totaled $24.7
billion at June 30, 2005. As part of its cash management strategy, from time
to time GMAC repurchases previously issued debt, but does so in a manner
that does not compromise overall liquidity.
32
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (continued)
Status of Debt Ratings (concluded)
In addition, Residential Capital Corporation (ResCap), which was formed as
the holding company of GMAC's residential mortgage business, and in the second
quarter of 2005 successfully achieved an investment grade rating (independent
from GMAC), has a $1.75 billion syndicated term loan and $0.9 billion syndicated
line of credit committed through July 2008 and a $0.9 billion syndicated
line of credit committed through July 2006. In addition, Mortgage Interest
Networking Trust (MINT) has a $3.0 billion committed liquidity facility. MINT
is a special purpose entity administered by ResCap for the purpose of funding
assets as part of ResCap's mortgage warehouse funding program. This entity
funds the purchase of assets through the issuance of asset-backed commercial
paper and represents an important source of liquidity to ResCap. At June 30,
2005, MINT had commercial paper outstanding of $2.6 billion, which is
reflected as secured debt in the Corporation's Consolidated Balance Sheet.
Line of Credit Between GM and GMAC
GM and GMAC have historically entered into various financing arrangements.
Currently such arrangements include a $4 billion revolving line of credit from
GMAC to GM entered into in September 2003 that expires in September 2006.
Separately, GM extended a $6 billion revolving line of credit to GMAC in October
2002 that expires in December 2005. These credit lines are used for general
operating and seasonal working capital purposes and reduce external liquidity
requirements, given the differences in the timing of GM and GMAC's peak funding
requirements. The maximum amount drawn under these facilities during the quarter
ended June 30, 2005 was $1.4 billion by GM and $1.0 billion by GMAC. Similar
amounts drawn by GM and GMAC during the second quarter of 2004 were $1.5 billion
and $1.0 billion, respectively. Interest is payable on amounts advanced under
the arrangements based on market interest rates, adjusted to reflect the credit
rating of GM or GMAC in its capacity as borrower. On August 2, 2005 GM borrowed
$1.4 billion from GMAC under its revolving credit line in order to meet cash
flow needs arising during the annual two-week shut-down of its vehicle assembly
operations. GM plans to repay the $1.4 billion during the third quarter of 2005,
using cash flow from operations. On September 22, 2004 GM repaid $3.5 billion
to GMAC that it borrowed under the same credit line during the third quarter of
2004.
Automotive and Other Operations
At June 30, 2005, cash, marketable securities, and $4.2 billion ($3.5 billion
at December 31, 2004 and June 30, 2004) of readily-available assets of the VEBA
trust totaled $20.2 billion, compared with $23.3 billion at December 31, 2004
and $25.0 billion at June 30, 2004. The decrease of approximately 13% from
December 31, 2004 was primarily the result of the net loss of Auto & Other for
the first six months of 2005, and payments totaling approximately $2.5 billion
related to the GME restructuring initiative and to the agreement reached in
February 2005 between GM and Fiat to terminate the Master Agreement (including
the Put Option) between them, settle various disputes related thereto, and other
matters. The amount of GM's consolidated cash and marketable securities is
subject to intra-month and seasonal fluctuations and includes balances held by
various GM business units and subsidiaries worldwide that are needed to fund
their operations. In the first six months of 2005, GMAC paid GM $1.0 billion in
dividends. Additionally, on August 1, 2005, GMAC paid a $500 million cash
dividend to GM, bringing total year to date dividends to $1.5 billion. As
of June 30, 2005, $1.6 billion of cash and marketable securities was included in
GM's balances as a result of the consolidation of GM Daewoo. The increase to
$4.2 billion in readily-available assets in the VEBA results from higher
withdrawal capacity from the hourly VEBA trust due to increased other
postretirement employee benefit payments, and the addition of withdrawal
capacity from the salaried VEBA that was funded in 2004. Total assets in the
VEBA and 401(h) trusts used to pre-fund part of GM's other postretirement
benefits liability approximated $20.4 billion at June 30, 2005, $20.0 billion
at December 31, 2004, and $15.9 billion at June 30, 2004.
As noted above, during the second quarter of 2005, GM withdrew $1 billion
from its VEBA trust as reimbursement for its retiree health care payments. On
July 1, 2005, GM withdrew an additional $1 billion from the VEBA, and on a
quarter-by-quarter basis is evaluating the need for additional withdrawals as
the cost of health care continues to adversely affect GM's liquidity.
33
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (continued)
Automotive and Other Operations (concluded)
Long-term debt was $31.0 billion at June 30, 2005, compared with $30.5
billion at December 31, 2004 and $29.8 billion at June 30, 2004. As of June 30,
2005, $1.3 billion of long-term debt was included in GM's balance as a result of
the consolidation of GM Daewoo. The ratio of long-term debt to the total of
long-term debt and GM's net assets of Automotive and Other Operations was 90.7%
at June 30, 2005, 84.7% at December 31, 2004, and 84.9% at June 30, 2004. The
ratio of long-term debt and short-term loans payable to the total of this debt
and GM's net assets of Automotive and Other Operations was 91.1% at June 30,
2005, 85.5% at December 31, 2004, and 84.9% at June 30, 2004.
Net liquidity, calculated as cash, marketable securities, and $4.2 billion
($3.5 billion at December 31, 2004 and June 30, 2004) of readily-available
assets of the VEBA trust less the total of loans payable and long-term debt, was
a negative $12.4 billion at June 30, 2005, compared with a negative $9.2 billion
at December 31, 2004, and a negative $7.4 billion at June 30, 2004.
During the past several years General Electric Capital Corporation (GECC)
provided a trade payables program for suppliers to original equipment
manufacturers (OEMs) in a broad range of industries, including the automotive
industry. The program was available to suppliers of GM. In late 2004, GECC
decided that for strategic reasons it would discontinue offering that financing
program to suppliers of any OEMs, including suppliers in the automotive
industry. Under the program, OEMs became directly responsible to make payments
to GECC after GECC had paid the receivables that were originally due to the
suppliers from the OEMs. The former GECC program no longer services GM
suppliers. In the second quarter of 2005, GM and GMAC began offering a new
supplier finance program to a limited number of its suppliers. At June 30, 2005,
GM owed approximately $0.4 billion to GMAC under the new program, which amount
is included in the balances of net payable to FIO and net receivable from Auto &
Other in GM's Supplemental Information to the Consolidated Balance Sheets, and
is eliminated in GM's Consolidated Balance Sheets.
Financing and Insurance Operations
At June 30, 2005, GMAC's consolidated assets totaled $310.0 billion, compared
with $324.1 billion at December 31, 2004 and $297.0 billion at June 30, 2004.
The decrease from December 31, 2004 was attributable to a decrease in net
finance receivables and loans, from $200.2 billion at December 31, 2004 to
$178.3 billion at June 30, 2005, driven by decreases in retail and wholesale
automotive receivables, partly offset by an increase in loans held for sale. The
increase in GMAC's consolidated assets at June 30, 2005 compared with June 30,
2004 was due to higher balances of cash, investment securities, loans held for
sale, and investment in operating leases, partly offset by decreases in retail
and wholesale automotive receivables.
Consistent with the changes in asset levels, GMAC's total debt decreased to
$250.9 billion at June 30, 2005, compared with $267.7 billion at December 31,
2004. Debt was lower by $6.4 billion at June 30, 2004, at $244.5 billion. GMAC's
ratio of total debt to total stockholder's equity at June 30, 2005 was 11.1:1,
compared with 12.0:1 at December 31, 2004, and 11.1:1 at June 30, 2004. GMAC's
liquidity, as well as its ability to profit from ongoing activity, is in large
part dependent upon its timely access to capital and the costs associated with
raising funds in different segments of the unsecured and secured capital
markets. Part of GMAC's strategy in managing liquidity risk has been to develop
diversified funding sources across a global investor base and to extend debt
maturities over a longer period of time, thereby maintaining sufficient cash
balances. As an important part of its overall funding and liquidity strategy,
GMAC maintains substantial bank lines of credit. These bank lines of credit,
which totaled $45.8 billion at June 30, 2005, provide "back-up" liquidity and
represent additional funding sources, if required. In addition, GMAC enters into
secured funding facilities whereby, in certain facililties, third parties
(including third-party asset-backed commercial paper conduits) have committed to
purchase a minimum amount of receivables through a designated period of time.
The unused portion of the committed and uncommitted facilities totaled $24.7
billion at June 30, 2005. GMAC has also been able to diversify its unsecured
funding through the formation of Residential Capital Corporation (ResCap).
ResCap was formed as the holding company of GMAC's residential mortgage business
and in the second quarter of 2005 successfully achieved an investment grade
rating (independent from GMAC) and issued $4.0 billion of unsecured debt through
a private placement offering. Following the bond offering, in July 2005, ResCap
closed a $3.5 billion syndication of its bank facilities, which are intended to
be used primarily for general corporate and working capital purposes, as well as
to repay GMAC affiliate borrowings, thus providing additional liquidity to GMAC.
Additionally, GMAC has increased the use of secured funding sources beyond
traditional asset classes and geographic markets and has also increased the use
of automotive whole loan sales. the increase use of whole loan sales is part of
the migration to an "originate and sell" model for the U.S. automotive finance
business. Through July 2005, GMAC has executed $9 billion in whole loan sales.
34
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (concluded)
Financing and Insurance Operations (concluded)
In August 2005 GMAC announced that it had entered into a definitive
agreement to sell a 60% equity interest in GMAC Commercial Mortgage, while
maintaining the remaining 40% equity interest. Under the terms of the
transaction, GMAC Commercial Mortgage will repay all intercompany loans to
GMAC upon the closing, which is expected to occur in the fourth quarter of 2005,
thereby providing GMAC significant incremental liquidity.
Off-Balance Sheet Arrangements
GM and GMAC use off-balance sheet arrangements where economics and sound
business principles warrant their use. GM's principal use of off-balance sheet
arrangements occurs in connection with the securitization and sale of financial
assets generated or acquired in the ordinary course of business by GMAC and its
subsidiaries and, to a lesser extent, by GM. The assets securitized and sold by
GMAC and its subsidiaries consist principally of mortgages, and wholesale and
retail loans secured by vehicles sold through GM's dealer network. The assets
sold by GM consist principally of trade receivables.
In addition, GM leases real estate and equipment from various off-balance
sheet entities that have been established to facilitate the financing of those
assets for GM by nationally prominent lessors that GM believes are creditworthy.
These assets consist principally of office buildings, warehouses, and machinery
and equipment. The use of such entities allows the parties providing the
financing to isolate particular assets in a single entity and thereby syndicate
the financing to multiple third parties. This is a conventional financing
technique used to lower the cost of borrowing and, thus, the lease cost to a
lessee such as GM.
There is a well-established market in which institutions participate in the
financing of such property through their purchase of ownership interests in
these entities and each is owned by institutions that are independent of, and
not affiliated with, GM. GM believes that no officers, directors or employees of
GM, GMAC, or their affiliates hold any direct or indirect equity interests in
such entities.
Assets in off-balance sheet entities were as follows (dollars in millions):
June 30, Dec. 31, June 30,
Automotive and Other Operations 2005 2004 2004
------------------------------- ---- ---- ----
Assets leased under operating leases $2,455 $2,553 $2,293
Trade receivables sold (1) 1,090 1,210 910
----- ----- -----
Total $3,545 $3,763 $3,203
===== ===== =====
Financing and Insurance Operations
----------------------------------
Receivables sold or securitized:
- Mortgage loans $90,309 $79,389 $82,852
- Retail finance receivables 7,675 5,615 7,112
- Wholesale finance receivables 21,396 21,291 17,231
------- ------- -------
Total $119,380 $106,295 $107,195
======= ======= =======
(1) In addition, trade receivables sold to GMAC were $590 million, $549
million and $456 million for the periods ended June 30, 2005, December 31,
2004, and June 30, 2004, respectively.
BOOK VALUE PER SHARE
Book value per share was determined based on the liquidation rights of the
common stockholders. Book value per share of GM $1-2/3 par value common stock
was $44.30 at June 30, 2005, $49.06 at December 31, 2004, and $49.11 at June 30,
2004.
DIVIDENDS
Dividends may be paid on GM's $1-2/3 par value common stock only when, as,
and if declared by the GM Board in its sole discretion. The amount available for
the payment of dividends on common stock will be reduced on occasion by
dividends paid and will be adjusted on occasion for changes to the amount of
surplus attributed to the stock resulting from the repurchase or issuance of
shares of stock.
GM's policy is to distribute dividends on its $1-2/3 par value common stock
based on the outlook and indicated capital needs of the business. On May 9,
2005, the GM Board declared a quarterly cash dividend of $0.50 per share on GM
$1-2/3 par value common stock, paid June 10, 2005, to holders of record on May
19, 2005.
35
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
EMPLOYMENT AND PAYROLLS
Worldwide employment for GM and its wholly-owned
subsidiaries at June 30, (in thousands) 2005 2004
---- ----
GMNA 177 186
GME 58 62
GMLAAM 32 27
GMAP 14 14
GMAC 34 33
Other 4 5
--- ---
Total employees 319 327
=== ===
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Worldwide payrolls - (in billions) $5.2 $5.5 $10.5 $11.0
=== === ==== ====
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements of GM are prepared in conformity with
GAAP, which requires the use of estimates, judgments, and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. GM's accounting policies and critical accounting
estimates are consistent with those described in Note 1 to the 2004 Consolidated
Financial Statements. Management believes that the accounting estimates employed
are appropriate and resulting balances are reasonable; however, actual results
could differ from the original estimates, requiring adjustments to these
balances in future periods. The Corporation has discussed the development,
selection and disclosures of its critical accounting estimates with the Audit
Committee of GM's Board of Directors, and the Audit Committee has reviewed the
Corporation's disclosures relating to these estimates.
Pension and Other Postretirement Employee Benefits (OPEB)
Pension and OPEB costs and liabilities are dependent on assumptions used in
calculating such amounts. These assumptions include discount rates, health-care
cost trend rates, benefits earned, interest cost, expected return on plan
assets, mortality rates, and other factors. In accordance with GAAP, actual
results that differ from the assumptions are accumulated and amortized over
future periods and, therefore, generally affect recognized expense and the
recorded obligation in future periods. While management believes that the
assumptions used are appropriate, differences in actual experience or changes in
assumptions may affect GM's pension and other postretirement obligations and
future expense.
GM has established for its U.S. pension plans a discount rate of 5.75% for
year-end 2004, which represents a 25 basis point reduction from the 6.00%
discount rate used at year-end 2003. GM's U.S. pre-tax pension expense is
forecasted to decrease from approximately $1.5 billion in 2004, excluding
curtailments and settlements, to approximately $1.2 billion in 2005 due to the
approximately 14% 2004 actual return on assets, partially offset by a lower 2004
year-end discount rate.
The following information illustrates the sensitivity to a change in certain
assumptions for U.S. pension plans (as of December 31, 2004 the projected
benefit obligation (PBO) for U.S. pension plans was $89 billion and the minimum
pension liability charged to equity with respect to U.S. pension plans was $108
million net of tax):
Effect on
Effect on 2005 December 31, 2004
Change in Assumption Pre-Tax Pension Expense PBO
--------------------------------------------------------------------------
25 basis point decrease
in discount rate +$160 million +$2.3 billion
25 basis point increase
in discount rate -$160 million -$2.2 billion
25 basis point decrease
in expected return on
assets +$220 million -
25 basis point increase
in expected return on
assets -$220 million -
36
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CRITICAL ACCOUNTING ESTIMATES (concluded)
GM's U.S. pension plans generally provide covered U.S. hourly employees with
pension benefits of negotiated, flat dollar amounts for each year of credited
service earned by an individual employee. Formulas providing for such stated
amounts are contained in the prevailing labor contract. Consistent with GAAP,
the 2005 pre-tax pension expense and December 31, 2004 PBO do not comprehend any
future benefit increases beyond the amounts stated in the currently prevailing
contract that expires in September 2007. The current cycle for negotiating new
labor contracts is every four years. There is no past practice of maintaining a
consistent level of benefit increases or decreases from one contract to the
next. However, the following data illustrates the sensitivity of pension expense
and PBO to hypothetical assumed changes in future basic benefits. An annual 1%
increase in the basic benefit for U.S. hourly employees would result in a $112
million increase in 2005 pre-tax pension expense and a $523 million increase in
the December 31, 2004 PBO. An annual 1% decrease in the same benefit would
result in a $104 million decrease in 2005 pre-tax pension expense and a $487
million decrease in the December 31, 2004 PBO.
These changes in assumptions would have no effect on GM's funding
requirements. In addition, at December 31, 2004, a 25 basis point decrease in
the discount rate would decrease stockholders' equity by $19.0 million, net of
tax; a 25 basis point increase in the discount rate would increase stockholders'
equity by $19.0 million, net of tax. The impact of greater than a 25 basis point
decrease/increase in discount rate would not be proportional to the first 25
basis point decrease/increase in the discount rate.
GM has established for its U.S. OPEB plans a discount rate of 5.75% for
year-end 2004, which represents a 50 basis point reduction from the 6.25%
discount rate used at year-end 2003.
The following table illustrates the sensitivity to a change in the discount
rate assumption related to GM's U.S. OPEB plans (the U.S. accumulated
postretirement benefit obligation [APBO] was a significant portion of GM's
worldwide APBO of $77.5 billion as of December 31, 2004):
Effect on 2005 Effect on
Pre-Tax OPEB December 31, 2004
Change in Assumption Expense APBO
-------------------------------------------------------------------------------
25 basis point decrease in
discount rate +$200 million +$2.1 billion
25 basis point increase in
discount rate -$200 million -$2.1 billion
GM assumes a 10.5% initial health-care cost trend rate and a 5.0% ultimate
health-care cost trend rate as of December 31, 2004. A one percentage point
increase in the initial through ultimate assumed health-care trend rates would
have increased the APBO by $8.4 billion at December 31, 2004, and the aggregate
service and interest cost components of non-pension postretirement benefit
expense for 2004 by $543 million. A one-percentage point decrease would have
decreased the APBO by $7.0 billion and the aggregate service and interest cost
components of non-pension postretirement benefit expense for 2004 by $384
million.
The above sensitivities reflect the effect of changing one assumption at a
time. It should be noted that economic factors and conditions often affect
multiple assumptions simultaneously and the effects of changes in key
assumptions are not necessarily linear.
37
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB) revised
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS No. 123R), requiring companies to record share-based payment
transactions as compensation expense at fair market value. SFAS No. 123R further
defines the concept of fair market value as it relates to such arrangements.
Based on SEC guidance issued in Staff Accounting Bulletin (SAB) 107 in April
2005, the provisions of this statement will be effective for General Motors as
of January 1, 2006. The Corporation began expensing the fair market value of
newly granted stock options and other stock based compensation awards to
employees pursuant to SFAS No. 123 in 2003; therefore this statement is not
expected to have a material effect on GM's consolidated financial position or
results of operations.
In March 2005, the FASB released FASB Staff Position (FSP) FIN 46(R)-5, which
addresses whether a corporation should consider whether it holds an implicit
interest in a variable interest entity (VIE) or potential VIE when specific
conditions exist to determine if the guidance in FASB Interpretation No. 46
(Revised 2003), "Consolidation of Variable Interest Entities" (FIN 46(R)),
should be applied. GM had adopted FIN 46(R) as of January 1, 2004. GM adopted
FSP FIN 46(R)-5 upon issuance. The Interpretation did not have an effect on GM's
consolidated financial position or results of operations.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143, Accounting
for Asset Retirement Obligations." FIN 47 requires an entity to recognize a
liability for the fair value of a conditional asset retirement obligation when
incurred if the liability's fair value can be reasonably estimated. This
interpretation is effective for fiscal years ending after December 15, 2005.
Management does not expect this interpretation to have a material impact on GM's
consolidated financial position or results of operations.
In April 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," requiring retrospective application as the required method for
reporting a change in accounting principle, unless impracticable or a
pronouncement includes specific transition provisions. This statement also
requires that a change in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. This statement carries
forward the guidance in APB Opinion No. 20, "Accounting Changes," for the
reporting of the correction of an error and a change in accounting estimate.
This statement is effective for accounting changes and correction of errors made
in fiscal years beginning after December 15, 2005. This statement is not
expected to have a material effect on GM's consolidated financial position or
results of operations.
FORWARD-LOOKING STATEMENTS
In this report, in reports subsequently filed or furnished by GM with the SEC
on Form 8-K, and in related comments by management of GM our use of the words
"expect," "anticipate," "estimate," "forecast," "objective," "plan," "goal,"
"project," "priorities/targets," and similar expressions is intended to identify
forward-looking statements. While these statements represent our current
judgment on what the future may hold, and we believe these judgments are
reasonable, actual results may differ materially due to numerous important
factors that are described below and other factors that may be described in
subsequent reports that GM may file or furnish with the SEC on Form 8-K:
o Changes in economic conditions, currency exchange rates or political
stability;
o Shortages of and price increase for fuel, labor strikes or work
stoppages, health-care costs, market acceptance of the Corporation's new
products, pace of product introductions;
o Significant changes in the competitive environment;
o Changes in the laws, regulations, and tax rates; and
o The ability of the Corporation to achieve reductions in cost and
employment levels, to realize production efficiencies, and to implement
capital expenditures, all at the levels and times planned by management.
* * * * * * *
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the Corporation's exposure to
market risk since December 31, 2004. See Item 7A in GM's Annual Report on Form
10-K for the year ended December 31, 2004.
* * * * * * *
38
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 4. Controls and Procedures
The Corporation maintains disclosure controls and procedures designed to
ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the specified time periods.
GM's CEO and CFO, after evaluating the effectiveness of GM's disclosure
controls and procedures (as defined in the Securities Exchange Act of 1934 Rules
13a-15(e) or 15d-15(e)) as of the end of the period covered by this report, have
concluded that based on the evaluation of these controls and procedures required
by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, that GM's disclosure
controls and procedures were effective.
There were no changes in the Corporation's internal control over financial
reporting that occurred during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
* * * * * * *
PART II
ITEM 1. Legal Proceedings
(a) Material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Corporation, or its
principal subsidiaries, became a party during the quarter ended June 30,
2005 or subsequent thereto, but before the filing of this report are
summarized below:
Environmental Matters
---------------------
With respect to the previously reported matter in which the EPA had issued an
Administrative complaint on October 17, 2003 against General Motors in
connection with the Corporation's assembly facilities in Moraine, Ohio, Pontiac,
Michigan, and Orion, Michigan, the EPA has issued an additional complaint
against the Corporation's assembly facility in Linden, New Jersey. The
complaints allege multiple violations of the hazardous waste rules as applied to
GM's painting and purge operations. The EPA is seeking aggregate penalties in
excess of $700,000. GM believes that the complaints are without merit because
the purge material in question is not a "waste" but instead is being used as
intended in enclosed systems to clean, suspend paint solids, and transport
fluids. The purge material is thereafter captured, reclaimed, and reused by GM
in its processes. GM intends to vigorously assert its defenses and the merits of
its own position.
* * * * * * * * *
ITEM 2(c). Purchases of Equity Securities
GM made no purchases of GM $1-2/3 par value common stock during the three months
ended June 30, 2005:
* * * * * * * * *
39
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Registrant was held on June 7, 2005.
At that meeting, the following matters were submitted to a vote of the
stockholders of General Motors Corporation:
Final Voting Results
------------------------
Votes Percent
----- -------
Item No. 1
Nomination and election of directors
The following nominees for directors received the number of votes set
opposite their respective names and were elected to serve on the
Board of Directors:
Percy N. Barnevik For 435,573,871 96.4%
Withheld 16,229,499 3.6
Erskine B. Bowles For 435,338,372 96.4
Withheld 16,464,998 3.6
John H. Bryan For 434,637,167 96.2
Withheld 17,166,203 3.8
Armando M. Codina For 435,610,153 96.4
Withheld 16,193,217 3.6
George M.C. Fisher For 435,510,227 96.4
Withheld 16,293,143 3.6
Karen Katen For 435,249,591 96.3
Withheld 16,553,779 3.7
Kent Kresa For 431,532,881 95.5
Withheld 20,270,489 4.5
Ellen J. Kullman For 435,650,233 96.4
Withheld 16,153,137 3.6
Philip A. Laskawy For 430,808,969 95.4
Withheld 20,994,401 4.6
E. Stanley O'Neal For 429,518,905 95.1
Withheld 22,284,465 4.9
Eckhard Pfeiffer For 431,562,688 95.5
Withheld 20,240,682 4.5
G. Richard Wagoner, Jr. For 434,782,441 96.2
Withheld 17,020,929 3.8
In addition, 40 votes were cast 0.0
for each of the following:
John Chevedden, James Dollinger,
William Dean Fitzpatrick,
Lucy Kessler, John Lauve,
Louis Lauve III, Steve Mahac,
Erik Nielsen, Larry Parks,
Danny Taylor, William L. Walde,
William Woodward, M.D.
Item No. 2
Ratification of the For 436,239,301 96.5
selection of Deloitte & Not in favor
Touche LLP as independent Against 5,746,953 1.3
public accountants for Abstain 9,817,116 2.2
the year 2005 ---------- ---
Total 15,564,069 3.5
Broker Non-Vote -- --
Item No. 3
Stockholder proposal to For 29,016,448 8.7
eliminate awarding, Not in favor
repricing, or renewing Against 292,351,492 87.8
stock options Abstain 11,677,305 3.5
----------- ----
Total 304,028,797 91.3
Broker Non-
Vote 118,758,125 --
40
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Final Voting Results
------------------------
Votes Percent
----- -------
Item No. 4
Stockholder proposal to For 160,046,670 48.1
adopt cumulative vo Not in favor
Against 160,629,512 48.2
Abstain 12,369,063 3.7
----------- ----
Total 172,998,575 51.9
Broker Non-
Vote 118,758,125 --
Item No. 5
Stockholder proposal to For 17,800,637 5.3
request report on Not in favor
greenhouse gas emissions Against 298,968,298 89.8
Abstain 16,276,310 4.9
----------- ----
Total 315,244,608 94.7
Broker Non-
Vote 118,758,125 --
Item No. 6
Stockholder proposal to For 52,185,878 15.7
request stockholder Not in favor
approval for future Against 269,709,468 81.0
golden parachutes Abstain 11,149,899 3.3
----------- ----
Total 280,859,367 84.3
Broker Non-
Vote 118,758,125 --
Item No. 7
Stockholder proposal to For 33,241,368 10.0
apply simple majority Not in favor
vote on items subject Against 287,943,588 86.4
to stockholder vote Abstain 11,860,289 3.6
----------- ----
Total 299,803,877 90.0
Broker Non-
Vote 118,758,125 --
* * * * * *
ITEM 6. Exhibits
Exhibit Page
Number Exhibit Name Number
------ ------------ ------
31.1 Section 302 Certification of the Chief Executive Officer 43
31.2 Section 302 Certification of the Chief Financial Officer 44
32.1 Certification of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 45
32.2 Certification of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 46
* * * * * *
41
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
SIGNATURES
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)
Date: August 8, 2005 By: /s/PETER R. BIBLE
--- -----------------
(Peter R. Bible,
Chief Accounting Officer)
42