UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004

 

Form 10-Q

 

 

 

 

Commission file number 1-143

 

GENERAL MOTORS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

(313) 556-5000

Registrant’s telephone number, including area code

 

NA

(former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of July 31, 2007, the number of shares outstanding of the Registrant’s common stock was 565,870,304 shares.

 

Website Access to Company’s Reports

 

General Motors Corporation’s internet website address is www.gm.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.

 

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

INDEX

 

PART I

 

 

Reference should be made to the notes to the condensed consolidated financial statements.

 

 

Reference should be made to the notes to the condensed consolidated financial statements.

 

 

Reference should be made to the notes to the condensed consolidated financial statements.

 

 

Reference should be made to the notes to the condensed consolidated financial statements.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

General Motors Corporation (GM) is primarily engaged in the worldwide production and marketing of cars and trucks. GM develops, manufactures, and markets vehicles worldwide through its four automotive regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP). Also, GM’s finance and insurance operations are primarily conducted through GMAC LLC, the successor to General Motors Acceptance Corporation (together with GMAC LLC, GMAC), a wholly-owned subsidiary through November 2006. On November 30, 2006, GM sold a 51% controlling ownership interest in GMAC to a consortium of investors. After the sale, GM has accounted for its 49% ownership interest in GMAC using the equity method. GMAC provides a broad range of financial services, including consumer vehicle financing, automotive dealership and other commercial financing, residential mortgage services, automobile service contracts, personal automobile insurance coverage and selected commercial insurance coverage. GM operates in two businesses, consisting of Automotive (GM Automotive or GMA) and Financing and Insurance Operations (FIO).

 

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, these Condensed Consolidated Financial Statements include all adjustments, consisting of only normal recurring items, considered necessary for a fair presentation of the financial position and results of operations of GM. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in GM’s Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the SEC.

 

The Condensed Consolidated Financial Statements include the accounts of GM and its subsidiaries that are controlled by GM due to ownership of a majority voting interest. In addition, GM consolidates variable interest entities (VIEs) for which it is the primary beneficiary. GM’s share of earnings or losses of investees are included in the consolidated operating results using the equity method of accounting, when GM is able to exercise significant influence over the operating and financial decisions of the investee. If GM is not able to exercise significant influence over the operating and financial decisions of the investee, the cost method of accounting is used. All intercompany balances and transactions have been eliminated in consolidation.

 

Change in Presentation of Financial Statements

 

In 2007, GM changed its income statement presentation to present costs and expenses of its FIO operations as a separate line. In so doing, GM reclassified FIO’s portion of Selling, general, and administrative expense and Interest expense to Financial services and insurance expense. Also, Automotive and other interest expense has been presented within non-operating income and expenses. Additionally, prior period results have been reclassified for the retroactive effect of discontinued operations. Refer to Note 3. Certain reclassifications have been made to the comparable 2006 restated financial information to conform to the current period presentation.

 

Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans

 

As previously reported in our 2006 Annual Report on Form 10-K, GM recognized the funded status of its benefit plans at December 31, 2006 in accordance with the recognition provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS No. 158). Additionally, GM elected to early adopt the measurement date provisions of SFAS No. 158

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

at January 1, 2007. Those provisions require the measurement date for plan assets and liabilities to coincide with the sponsor’s year end. Refer to Note 13.

 

Accounting for Uncertainty in Income Taxes

 

During the first quarter of 2007, GM adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109, “Accounting for Income Taxes”, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings and reported as a change in accounting principle. GM adopted FIN 48 as of January 1, 2007, and recorded an increase to retained earnings of $137.1 million as a cumulative effect of a change in accounting principle with a corresponding decrease to the liability for uncertain tax positions. Refer to Note 10 for more information regarding the impact of adopting FIN 48.

 

Accounting for Early Retirement or Postemployment Programs with Specific Features

 

On January 1, 2006, GM adopted Emerging Issues Task Force Issue No. 05-5, “Accounting for Early Retirement or Postemployment Programs with Specific Features” (EITF 05-5), which states that the bonus and contributions made into the German government pension program should be accounted for under the guidance in SFAS No. 112, “Employers’ Accounting for Postemployment Benefit Costs” and the government subsidy should be recognized when a company meets the necessary conditions to be entitled to the subsidy. As clarified in EITF 05-5, beginning in 2006, GM recognized the bonus and additional contributions (collectively, additional compensation) into the German government pension plan over the period from which the employee signed the program contract until the end of the active service period. Prior to 2006, GM recognized the full additional compensation one-year before the employee entered the active service period. The change, reported as a change in accounting estimate effected by a change in accounting principle, resulted in additional compensation expense of $68 million for the six months ended June 30, 2006.

 

Accounting for Servicing of Financial Assets

 

On January 1, 2006, GM adopted SFAS No. 156, “Accounting for Servicing of Financial Assets” (SFAS No. 156), which (1) provides revised guidance on when a servicing asset and servicing liability should be recognized, (2) requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable, (3) permits an entity to elect to measure servicing assets and liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur, (4) provides that upon initial adoption, a one-time reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting an entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value, and (5) requires separate presentation of servicing assets and liabilities subsequently measured at fair value in the balance sheet and additional disclosures. GM recorded a reduction to retained earnings as of January 1, 2006 of $13 million as a cumulative effect of a change in accounting principle for the adoption of SFAS No. 156.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

Accounting Standards Not Yet Adopted

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS No. 157), which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions of SFAS No. 157 are to be applied prospectively. Management is currently assessing the potential impact of the standard on GM’s financial condition and results of operations.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS No. 115” (SFAS No. 159), which permits an entity to measure certain financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions. SFAS No. 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. The statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. Management is currently assessing the potential impact of the standard on GM’s financial condition and results of operations.

 

In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3 “Accounting for Nonrefundable Payments for Goods or Services to Be Used in Future Research and Development Activities”, requiring that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts should be expensed as the related goods are delivered or the related services are performed. The statement is effective for fiscal years beginning after December 15, 2007. Management is currently assessing the potential impact of the standard on GM’s financial condition and results of operations.

 

In June 2007, the FASB ratified EITF Issue No. 06-11 “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11), which requires entities to record tax benefits on dividends or dividend equivalents that are charged to retained earnings for certain share-based awards to additional paid-in capital. In a share-based payment arrangement, employees may receive dividends or dividend equivalents on awards of nonvested equity shares, nonvested equity share units during the vesting period, and share options until the exercise date. Generally, the payment of such dividends can be treated as deductible compensation for tax purposes. The amount of tax benefits recognized in additional paid-in capital should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those years. Management does not expect this guidance to have a material effect on GM’s financial condition and results of operations.

 

 

Sale of Allison Transmission Business

 

On June 28, 2007, GM entered into a definitive agreement pursuant to which GM will sell the commercial and military operations of our Allison Transmission (Allison) business for a purchase price of approximately $5.6 billion in cash plus assumed liabilities. The purchase price is subject to adjustment based on the amount of Allison’s (1) net working capital and (2) debt on the closing date. Based on these amounts, a payment may be due from either party within approximately thirty-five days after the closing date. Any such payment will be an adjustment to the amount of gain recognized on the transaction. Allison, a division of GM’s Powertrain Operations, is a global leader in the design and manufacture of commercial and military automatic transmissions and a premier global provider of commercial vehicle automatic transmissions for on-highway, including trucks, specialty vehicles, buses and

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

recreational vehicles, off-highway and military vehicles, as well as hybrid propulsion systems for transit buses. GM Powertrain Operations Baltimore facility, which manufactures automatic transmissions primarily for GM trucks and hybrid propulsion system, will be retained by GM. GM expects to recognize a gain on the sale of Allison in the range of $5.1 billion to $5.4 billion. GM expects to close the sale of Allison in the third quarter of 2007, subject to regulatory approval.

 

At June 30, 2007, Allison met the held for sale criteria under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), and therefore, certain assets and liabilities of Allison are presented as held for sale, and GM has ceased depreciation on Allison’s long-lived assets classified as held for sale. The results of operations and cash flows of Allison have been reported in the Condensed Consolidated Financial Statements as discontinued operations for all periods presented.

 

Historically, Allison had been reported in the Automotive business. The following table presents Allison’s major classes of assets and liabilities classified as held for sale as of June 30, 2007 (dollars in millions):

 

 

The table above represents the respective assets and liabilities that are held for sale as of June 30, 2007, which excludes certain assets and liabilities, consisting of cash, limited accounts receivable, inventory, tooling, taxes payable, deferred income taxes and a synthetic lease obligation of the facility that is being retained. The held for sale asset and liability balances at June 30, 2007 may differ from the respective balances at closing.

 

The following table summarizes the results of discontinued operations (dollars in millions):

 

 

As part of the transaction, GM and the buyers of Allison are negotiating for GM to provide the new parent company of Allison with contingent financing of up to $100 million. Such financing would be made available if, during a defined period of time, Allison were not in compliance with its financial maintenance covenant under the credit agreement and the buyer were to elect to make an equity contribution into Allison to bring it into compliance. Such financing would be contingent on Allison’s buyers committing to provide an equivalent amount of funding to Allison through its parent company on the same terms as the GM loan under such circumstances. Additionally, both

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

parties have entered into non-compete arrangements for a term of 10 years in the U.S. and for a term of 5 years in Europe.

 

Sale of 51% Controlling Interest in GMAC

 

In April 2006, GM and its wholly owned subsidiaries, GMAC and GM Finance Co. Holdings Inc., entered into a definitive agreement pursuant to which GM agreed to sell a 51% controlling interest in GMAC for a purchase price of $7.4 billion to FIM Holdings LLC (FIM Holdings). FIM Holdings is a consortium of investors, including Cerberus FIM Investors, LLC, Citigroup Inc., Aozora Bank Limited, and a subsidiary of the PNC Financial Services Group, Inc. The sale was completed on November 30, 2006. GM has retained a 49% interest in GMAC’s Common Membership Interests. The total value of the cash proceeds and distributions to GM after repayment of certain intercompany obligations, and before it purchased the preferred membership interests of GMAC was expected to be approximately $14 billion over three years, comprised of the $7.4 billion purchase price and $2.7 billion cash dividend at closing, and other transaction related cash flows including the monetization of certain retained assets. In March 2007, GM made a capital contribution to GMAC of approximately $1 billion to restore its adjusted tangible equity balance to the contractually required amount of $14.4 billion, due to the decrease in the adjusted tangible equity balance of GMAC as of November 30, 2006.

 

For the three and six months ended June 30, 2006, GMAC’s earnings and cash flows are fully consolidated in GM’s Condensed Consolidated Statements of Operations and Statements of Cash Flows. However, as a result of the agreement to sell 51% equity interest, certain assets and liabilities of GMAC were classified as held for sale in GM’s Condensed Consolidated Balance Sheet as of June 30, 2006. Pursuant to SFAS No. 144, GM ceased depreciation on GMAC long-lived assets classified as held for sale in GM’s consolidated financial statements. The following table presents GMAC’s major classes of assets and liabilities classified as held for sale as of June 30, 2006 (dollars in millions):

 

 

The table above represents 100% of the respective assets and liabilities of GMAC that were held for sale as of June 30, 2006. The transaction resulted in the divesture of a 51% interest in GMAC.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

GM recognized a non-cash impairment charge of approximately $2.9 billion in 2006, of which $1.2 billion is recorded in Other expenses in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 to reflect GMAC’s assets that were classified as held for sale at the lower of carrying value or fair value less costs to sell. The total charge is comprised of the write-down of the carrying value of GMAC assets that were sold on November 30, 2006 partially offset by the realization of 51% of the unrecognized net gains reflected in GMAC’s Accumulated other comprehensive income.

 

Refer to Notes 1, 5, and 17 for additional information regarding the sale of, investment in, and transactions with, GMAC.

 

Sale of GMAC Commercial Mortgage

 

In March 2006, GM, through GMAC, sold approximately 79% of our equity in GMAC Commercial Mortgage for approximately $1.5 billion in cash. At the closing, GMAC Commercial Mortgage also repaid to us approximately $7.3 billion of intercompany loans, for total cash proceeds of $8.8 billion. Subsequent to the sale, the remaining interest in GMAC Commercial Mortgage was reflected using the equity method.

 

 

Inventories are comprised of the following:

 

 

 

Nonconsolidated affiliates of GM identified herein are those entities in which GM owns an equity interest and for which GM uses the equity method of accounting, because GM has the ability to exert significant influence over decisions relating to their operating and financial affairs. GM’s significant affiliates and the percent of GM’s current equity ownership or voting interest in them are as follows:

 

United States — GMAC (49% at June 30, 2007 and 100% at June 30, 2006)

 

China — Shanghai General Motors Co., Ltd (50% at June 30, 2007 and 2006) and SAIC-GM-Wuling Automobile Co., Ltd (34% at June 30, 2007 and 2006)

 

GMAC was a wholly-owned subsidiary of GM during the three and six months ended June 30, 2006. In November 2006, GM sold a 51% controlling ownership interest in GMAC. The remaining 49% interest held by GM, in the form of GMAC Common Membership Interests, is accounted for using the equity method. In addition, GM acquired 1,555,000 Preferred Membership Interests representing approximately 74% of the Preferred Membership Interests for a cash price of $1.4 billion. The investment in GMAC Preferred Membership Interests, a cost method

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

investment, was initially recorded at fair value of $1.6 billion at the date of its acquisition. The excess of fair value over the cash exchanged for the Preferred Membership Interests reduced GM’s investment in GMAC Common Membership Interests. At June 30, 2007, GM’s investment in GMAC Preferred Membership Interests was $1.6 billion. GMAC is required to make certain quarterly distributions to holders of the Preferred Membership Interests in cash on a pro rata basis. The Preferred Membership Interests are issued in units of $1,000 and accrue a yield at a rate of 10% per annum. GM accrued a dividend of $38 million and $77 million for the three and six months ended June 30, 2007, respectively. Refer to Note 17 for a description of the related party transactions with GMAC.

 

Information regarding GM’s share of net income (loss) for the nonconsolidated affiliates is included in the table below:

 

 

Summarized financial information of GMAC is as follows:

 

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

 

In March 2006, GM sold 92.4 million shares of its investment in Suzuki Motor Corporation (Suzuki), reducing GM’s equity stake in Suzuki from 20.4% to 3.7% or 16.3 million shares. The sale of GM’s interest generated cash proceeds of $2 billion and resulted in a gain on the sale of $666 million, which was recorded in Automotive interest income and other non-operating income in the Condensed Consolidated Statement of Operations. Effective with completion of the sale, GM’s remaining investment in Suzuki is accounted for as an available-for-sale equity security.

 

In the second quarter of 2006, GMAC recognized a gain of $415 million on the sale of its equity interest in a regional home builder, which was recorded in the Automotive interest and other non-operating income in the Condensed Consolidated Statement of Operations. Under the equity method of accounting, GMAC’s share of income recorded from this investment was $22.5 million and $42.4 million for the three and six months ended June 30, 2006, respectively.

 

 

Policy, product warranty, recall campaigns and certified used vehicle warranty liabilities include the following:

 

 

Management reviews and adjusts these estimates on a regular basis based on the differences between actual experience and historical estimates or other available information.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

Costs to idle, consolidate or close facilities and provide postemployment benefits to employees idled on an other than temporary basis are accrued based on management’s best estimate of the wage and benefits costs that will be incurred for qualified employees under the Job Opportunity Bank-Security program (JOBS Bank) provisions of the current labor agreement through the date of its expiration in September 2007, plus estimated costs expected to be paid thereafter taking into account policy changes that GM intends to negotiate into the JOBS program after the expiration of the current collective bargaining agreement. Costs related to the idling of employees that are expected to be temporary are expensed as incurred. GM reviews the adequacy and continuing need for these liabilities on a quarterly basis in conjunction with its quarterly production and labor forecasts.

 

In March 2006, GM, Delphi Corporation (Delphi) and the International Union, United Auto, Aerospace and Agricultural Implement Workers of America (UAW) reached an agreement (the UAW Attrition Agreement) intended to reduce the number of U.S. hourly employees through an accelerated attrition program (the Attrition Program). Under the Attrition Program, GM provided certain UAW-represented employees at GM with (1) a lump sum payment of $35,000 for normal or early voluntary retirements retroactive to October 1, 2005; (2) a mutually satisfactory retirement for employees with at least 10 years of credited service and 50 years of age or older; (3) payment of gross monthly wages ranging from $2,750 to $2,900 to those employees who participate in a special voluntary pre-retirement program depending on years of credited service and plant work location; and (4) a buy-out of $140,000 for employees with 10 or more years of seniority, or $70,000 for employees with less than 10 years seniority, provided such employees severed all ties with GM except for any vested pension benefits. Approximately 34,400 GM hourly employees agreed to the terms of the Attrition Program. GM recorded a charge of $2.1 billion in 2006 to recognize the wage and benefit cost of those accepting normal and voluntary retirements, buy-outs or pre-retirement leaves. As a result of the Attrition Program, the JOBS Bank was substantially reduced as employees from the JOBS Bank retired, took a buy-out or filled openings created by the Attrition Program. Certain employees who chose to leave GM retired or left by January 1, 2007 but will continue to receive payments until 2010.

 

Throughout 2006, GM recorded favorable adjustments totaling $1 billion to the postemployment benefits reserve primarily as a result of (1) the transfer of employees from idled plants to other plant sites to replace those positions previously held by employees who accepted retirements, buy-outs, or pre-retirement leaves, (2) a higher than anticipated level of Attrition Program participation by employees at idled facilities and facilities to be idled that were previously accrued for under the JOBS Bank provisions, and (3) higher than anticipated headcount reductions associated with the GMNA plant idling activities announced in 2005. In 2005, GM recognized a charge of $1.8 billion for postemployment benefits related to the restructuring of its North American operations. Approximately 17,500 employees were included in the 2005 charge for locations included in this action, some leaving GM through attrition and the remainder transferring to other sites.

 

The liability for postemployment benefit costs of $865 million at June 30, 2007 reflects estimated future wages and benefits for 8,000 employees, primarily located at idled facilities and facilities to be idled and 4,400 employees subject to the terms of the Attrition Program. At December 31, 2006, the postemployment benefit costs liability reflects estimated future wages and benefits of $1.3 billion related to 8,500 employees, primarily located at idled facilities and facilities to be idled as a result of previous GMNA plant idling activities and 10,900 employees subject to the terms of the Attrition Program. The liability for postemployment benefit costs as of June 30, 2006 reflects estimated future wages and benefits of $2.8 billion related to 12,300 employees, primarily at idled facilities and facilities to be idled as a result of previous announcements and 32,500 employees under the terms of the Attrition Program.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

 

 

Revolving Credit Facilities

 

On June 22, 2007, GM entered into a short-term revolving credit agreement with a syndicate of third-party lenders, that provides for borrowings of up to $4.1 billion. Borrowings under the facility bear a variable interest rate at the prime rate or LIBOR, at the borrower’s option. The credit facility is collateralized by GM’s common equity interest in GMAC. The total commitment available under the agreement will be reduced or eliminated if GM’s interest held in the common equity of GMAC is either disposed of or diluted beyond specified thresholds as a result of a common stock issuance by GMAC. Commitment fees accrue and are paid on the used and unused portions of the facility. The borrowings are to be used for general corporate purposes, which may include funding portions of GM’s turnaround plan and addressing the potential risks and contingencies described below and in GM’s 2006 Annual Report on Form 10-K in “Risk Factors — Risks related to GM and its Automotive business”. No borrowings were outstanding under this agreement at June 30, 2007.

 

In May, 2007, GM entered into a revolving credit agreement expiring in June, 2008, with a lender that provides for borrowings of up to $.5 billion. Borrowings under the facility bear interest based on LIBOR. Commitment fees accrue and are paid on the unused portion of the facility. The borrowings are to be used for general corporate purposes including working capital needs. No borrowings were outstanding under this agreement at June 30, 2007.

 

Contingent Convertible Debt

 

In May, 2007, GM issued $1.5 billion of 1.5% Series D convertible debentures due in 2009, with interest payable semiannually. The debentures are senior unsecured obligations ranking equally with all other unsecured and unsubordinated debt. The Series D debentures may be converted at the option of the holder into common stock based on an initial conversion rate of .6837 shares per $25.00 principal amount of debentures, which represents an initial conversion price of approximately $36.57 per share. The conversion features of the Series D debentures become convertible upon the occurrence of one of the following events:

 

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

 

 

GM has committed to use cash, to settle the principal amount of the debentures if (1) holders choose to convert the debentures or (2) GM is required by the holders to repurchase the debentures. Upon conversion, GM retains the right to use cash, stock or a combination thereof, to settle any amount that may become due to debt holders in excess of the principal amount. The conversion price of $36.57 is subject to adjustment including but not limited to the occurrence of stock dividends, the issuance of rights and warrants, and the distribution of assets or debt securities to all holders of shares of common stock. In addition, in the event of a make-whole fundamental change, as defined in the underlying prospectus supplement, the conversion rate will be increased based on (1) the date on which such make-whole fundamental change becomes effective and (2) GM’s common stock price paid in the make-whole fundamental change or average common stock price. In any event, the conversion rate shall not exceed .8205 per $25.00 principal amount of Series D debentures, subject to adjustment for events previously mentioned. If a fundamental change occurs prior to maturity, the debenture holders may require GM to repurchase all or a portion of the debentures for cash at a price equal to the principal amount plus accrued and unpaid interest, if any, to, but not including, the date of repurchase. GM may not elect to redeem the Series D debentures prior to the maturity date.

 

In connection with the issuance of the Series D debentures, GM purchased a hedging instrument for the Series D debentures in a private transaction. The hedge instrument is expected to reduce the potential dilution with respect to GM’s common stock upon conversion of the Series D debentures to the extent that the market value per share of GM’s common stock does not exceed a specified cap, resulting in an effective conversion price of $45.71 per share. This transaction will terminate at the earlier of the maturity date of the Series D debentures or when the Series D debentures are no longer outstanding due to conversion or otherwise.

 

GM received net proceeds from the issuance of the Series D debentures, net of issue costs and the purchase of the convertible note hedge, of $1.4 billion. Debt issue costs of $32 million were incurred and are being amortized using the effective interest method over the term of the Series D debentures. In accordance with EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” GM recorded the cost of the convertible note hedge, which aggregated $99 million, as a reduction of additional paid-in capital. Any subsequent changes in fair value of the convertible note hedge are not recognized. The net proceeds will be used for general corporate purposes, which may include funding portions of GM’s turnaround plan and addressing the potential risks and contingencies described below and in GM’s 2006 Annual Report on Form 10-K in “Risk Factors — Risks related to GM and its Automotive business.”

 

 

Commitments

 

GM has provided guarantees in relation to the residual value of certain operating leases, primarily related to the lease of GM’s corporate headquarters. At June 30, 2007, the maximum potential amount of future undiscounted payments that could be required to be made under these guarantees amount to $636 million. These guarantees terminate in periods ranging from 2008 to 2018. Certain leases contain renewal options.

 

GM has agreements with third parties that guarantee the fulfillment of certain suppliers’ commitments. At June 30, 2007, the maximum potential future undiscounted payments that could be required to be made under these guarantees amounted to $80 million. Years of expiration pertaining to these guarantees range from 2007 to 2035. Other guarantees with a maximum potential amount of future undiscounted payments that could be required

 

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amounted to $4 million at June 30, 2007 with the period of expiration determined by business conditions, i.e., emergence from bankruptcy or the sale of the business.

 

In addition, in some instances, certain assets of the party whose debt or performance is guaranteed may offset, to some degree, the effect of the triggering of the guarantee. The offset of certain payables of GM may also apply to certain guarantees. No liabilities were recorded with respect to such guarantees as the amounts were determined to be insignificant.

 

GM also provides payment guarantees on commercial loans made by GMAC and outstanding with certain third-parties. As of June 30, 2007 maximum commercial obligations guaranteed by GM were approximately $132 million. Years of expiration pertaining to these guarantees range from 2007 to 2012. Based on the creditworthiness of these third parties, the value ascribed to the guarantees provided by GM was determined to be insignificant.

 

In addition, GM has entered into agreements with GMAC and FIM Holdings LLC, related to the disposal of its 51% interest in GMAC, that incorporate indemnification provisions. The maximum potential future undiscounted payments to which GM may be exposed in terms of these indemnification provisions amount to $2.5 billion. No amounts have been recorded for such indemnities as the fair value of these indemnifications is immaterial.

 

GM has entered into agreements indemnifying certain parties with respect to environmental conditions pertaining to existing or sold GM properties. Due to the nature of the indemnifications, GM’s maximum exposure under these guarantees cannot be estimated. No amounts have been recorded for such indemnities, as GM’s obligations are not probable or estimable at this time.

 

In addition to the guarantees and indemnifying agreements mentioned above, GM periodically enters into agreements that incorporate indemnification provisions in the normal course of business. Due to the nature of these agreements, the maximum potential amount of future undiscounted payments to which GM may be exposed cannot be estimated. No amounts have been recorded for such indemnities as GM’s obligations under them are not probable and estimable at this time.

 

Environmental

 

GM’s operations, like operations of other companies engaged in similar businesses, are subject to a wide range of environmental protection laws, including laws regulating air emissions, water discharges, waste management, and environmental cleanup. GM is in various stages of investigation or remediation for sites where contamination has been alleged. We are involved in a number of remediation actions to clean up hazardous wastes as required by federal and state laws. Such statutes require that responsible parties fund remediation actions regardless of fault, legality of original disposal or ownership of a disposal site.

 

The future impact of environmental matters, including potential liabilities, is often difficult to estimate. We record an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. This practice is followed whether the claims are asserted or unasserted. Management expects that the amounts reserved will be paid out over the periods of remediation for the applicable sites, which typically range from five to 30 years.

 

For many sites, the remediation costs and other damages for which we ultimately may be responsible are not reasonably estimable because of uncertainties with respect to factors such as our connection to the site or to materials there, the involvement of other potentially responsible parties, the application of laws and other standards or regulations, site conditions, and the nature and scope of investigations, studies, and remediation to be undertaken (including the technologies to be required and the extent, duration, and success of remediation). As a result, we are

 

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unable to determine or reasonably estimate the amount of costs or other damages for which we are potentially responsible in connection with these sites, although that total could be substantial.

 

While the final outcome of environmental matters cannot be predicted with certainty, it is the opinion of GM that none of these items, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, should a number of these items occur in the same period, it could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

 

Asbestos Claims

 

Like most automobile manufacturers, GM has been subject in recent years to asbestos-related claims. GM has seen these claims primarily arise from three circumstances. A majority of these claims seek damages for illnesses alleged to have resulted from asbestos used in brake components. A limited numbers of claims have arisen from asbestos contained in the insulation and brakes used in the manufacturing of locomotives, and claims brought by contractors who allege exposure to asbestos-containing products while working on premises owned by GM.

 

While GM has resolved many of the asbestos-related cases over the years and continues to do so for strategic litigation reasons such as avoiding defense costs and possible exposure to excessive verdicts, management believes that only a small proportion of the claimants has or will ever develop any asbestos-related impairment. Only a small percentage of the claims pending against GM allege causation of a malignant disease associated with asbestos exposure. The amount expended on asbestos-related matters in any year depends on the number of claims filed, the amount of pretrial proceedings, and the number of trials and settlements during the period.

 

GM records an estimated liability associated with reported asbestos claims when it believes that the expected loss is both probable and can be reasonably estimated. Prior to 2006, with respect to incurred but not yet reported claims, GM concluded that a range of probable losses was not reasonably estimable. Over the last several years, GM has continued to accumulate data associated with asbestos claims. Based on review of this data during the fourth quarter of 2006, management determined that it had enough information to determine a reasonable estimate of its projected incurred, but not yet reported, claims that could be asserted over the next two years. Based on its analysis, GM recorded a $127 million charge for unasserted asbestos claims during the three months ended December 31, 2006. GM believes its liability for asbestos claims is adequate.

 

The amounts recorded by GM for the asbestos-related claims were based upon currently known information. Future events, such as the number of new claims to be filed each year and the average cost of disposing of claims, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs to be significantly different from those projected. Due to the uncertainty inherent in factors used to determine GM’s asbestos-related liabilities, it is reasonably possible that future costs to resolve asbestos claims may be greater than the estimate; however, GM does not believe that it can reasonably estimate how much greater it could be.

 

While the final outcome of asbestos-related matters cannot be predicted with certainty, after discussion with counsel and considering, among other things liabilities that have been recorded, it is the opinion of management that none of these items, when finally resolved, is expected to have a material adverse effect on GM’s financial position or liquidity. However, should many of these items occur in the same period, they could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

 

Contingent Matters

 

During the second quarter of 2007, GM do Brasil recorded a $43 million charge for potential taxes and related matters concerning improperly registered material included in consignment contracts. This amount represents the low end of the range of potential additional taxes and fines that may be assessed. The range of possible fines based

 

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on information available is from $43 million to $450 million. GM do Brasil is providing documentation to the tax authorities that may reduce the fines that will eventually be paid.

 

Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, governmental investigations, claims, and proceedings are pending against GM, including a number of shareholder class actions, bondholder class actions, shareholder derivative suits and ERISA class actions and other matters arising out of alleged product defects, including asbestos-related claims; employment-related matters; governmental regulations relating to safety, emissions, and fuel economy; product warranties; financial services; dealer, supplier, and other contractual relationships; and environmental matters.

 

GM has established reserves for matters in which it believes that losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or other treble damage claims, or demands for recall campaigns, incurred but not reported asbestos-related claims, environmental remediation programs, or sanctions, that if granted, could require the Corporation to pay damages or make other expenditures in amounts that could not be reasonably estimated at June 30, 2007. While the final outcome of these matters cannot be predicted with certainty, after discussion with counsel, it is the opinion of management that such claims are not expected to have a material adverse effect on GM’s consolidated financial condition or results of operations. However, should many of these items occur in the same period, they could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

 

Delphi

 

In connection with GM’s spin-off of Delphi Corporation (Delphi) in 1999, GM entered into separate agreements with the UAW, the IUE-CWA and the United Steel Workers (Benefit Guarantee Agreements) providing contingent benefit guarantees to make payments for limited pension and postretirement health care and life insurance (OPEB) expenses to certain former GM U.S. hourly employees who transferred to Delphi and meet the eligibility requirements for such payments (Covered Employees). Each Benefit Guarantee Agreement contains separate benefit guarantees relating to pension and OPEB obligations, with different triggering events under which GM could be liable if Delphi fails to provide the corresponding benefit at the required level. Therefore, GM could incur liability under one of the guarantees (e.g., OPEB) without triggering the other guarantees (e.g., pension). In addition, with respect to pension benefits, GM’s guarantee of pension benefits arises only to the extent that the pension benefits provided by Delphi and the Pension Benefit Guaranty Corporation fall short of the guaranteed amount. The original benefit guarantees were scheduled to expire on October 18, 2007 unless Delphi triggered the benefit guarantees before that date by failing to provide the specified benefits. In a separate agreement between GM and Delphi, Delphi has indemnified GM for any payments under the Benefit Guarantee Agreements to the UAW employees and retirees (Indemnification Agreement). GM’s rights under this Indemnification Agreement were originally scheduled to expire on October 18, 2007, or on the expiration of any obligations of GM to provide benefits under the Benefit Guarantees. As described more fully below, in June 2007 GM agreed to extend the expiration date of the Benefit Guarantee Agreement with the UAW, and Delphi agreed to extend the expiration date of the Indemnification Agreement, under certain circumstances and within certain time periods.

 

Although GM’s obligations under the Benefit Guarantee Agreements have not been triggered by Delphi’s Chapter 11 filing in October 2005 or its motion in Bankruptcy Court to reject its U.S. labor agreements and modify retiree welfare benefits, GM believes it is probable that it has incurred a liability under the Benefit Guarantee Agreements and has previously recorded charges, net of expected recoveries, totaling $6 billion. The Benefit Guarantee Agreements do not obligate GM to guarantee any benefits for Delphi retirees in excess of the corresponding benefits GM provides at the time to its own hourly retirees. Accordingly, any reduction in the benefits GM provides its hourly retirees reduces GM’s obligation under the corresponding benefit guarantee.

 

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On June 22, 2007, GM, Delphi, and the UAW entered into a Memorandum of Understanding (UAW MOU) which included terms relating to the consensual triggering of the Benefit Guarantee Agreement with the UAW as well as certain new terms relating to Delphi’s restructuring. The UAW MOU was ratified by the UAW membership on June 28, 2007 and became effective upon receipt of Bankruptcy Court approval on July 19, 2007. The more significant items covered in the UAW MOU include (1) the extension of the GM-UAW benefit guarantee and the related Delphi indemnity, (2) an additional attrition program offered to Delphi UAW employees, (3) the settlement by GM of a UAW claim against Delphi, (4) GM support for future operations at certain Delphi sites, and (5) GM’s agreement to provide additional benefits for certain healthcare costs related to the Benefit Guarantee Agreement with the UAW. These items are described more fully below.

 

(1) GM agreed to extend the expiration date of the Benefit Guarantee Agreement with the UAW from October 18, 2007 to December 31, 2007. If Delphi has commenced solicitation of acceptance of its plan of reorganization prior to December 31, 2007, but the plan has not been confirmed and substantially consummated by then, the Benefit Guarantee Agreement with the UAW would be further extended to March 31, 2008. Delphi agreed through the UAW MOU to extend its agreement to indemnify GM for payments made under the Benefit Guarantee Agreement with the UAW on the same basis and for the same time period. GM also agreed that if Delphi terminates its pension plan, ceases to provide on-going service, or fails or refuses to provide post-retirement medical benefits for certain UAW employees at any time before both (a) GM and Delphi execute a comprehensive settlement agreement resolving the financial, commercial and other matters between them (GM-Delphi Settlement Agreement) and (b) the U.S. Bankruptcy Court substantially confirms a Delphi plan of reorganization that incorporates, approves and is consistent with the GM-Delphi Settlement Agreement, the applicable provisions of the Benefit Guarantee Agreement will be triggered for those UAW employees.

 

(2) Delphi and the UAW agreed to the terms of an additional attrition program with terms substantially consistent with that previously offered to GM and Delphi employees as described in Note 7. GM’s financial contributions related to this additional program are currently being negotiated as part of a separate agreement with Delphi which has not yet been finalized (GM-Delphi Settlement Agreement).

 

(3) GM committed to pay $450 million to settle a UAW claim asserted against Delphi, which the UAW has directed GM to pay directly to the GM UAW VEBA trust. GM expects to make this payment upon execution of the GM-Delphi Settlement Agreement and substantial consummation of Delphi’s reorganization plan, confirmed by the Bankruptcy Court, which incorporates the GM-Delphi Settlement Agreement.

 

(4) Delphi and the UAW agreed to plans to close certain Delphi sites and divest others. GM has agreed to assist Delphi with such closures and divestitures which, under certain circumstances, may require GM to facilitate the transfer of operations to third parties by specified dates. In addition, Delphi and the UAW agreed to continue operating certain Delphi sites at which GM will provide future product programs. GM’s financial contributions related to these sites are currently being negotiated as part of the GM-Delphi Settlement Agreement.

 

(5) GM agreed to pay for certain healthcare costs of Delphi retirees and their beneficiaries in order to provide a level of benefits that is consistent with that being provided to GM retirees and their beneficiaries from the Mitigation Plan VEBA. The actuarially determined cost to GM of providing these benefits is estimated to be approximately $360 million.

 

On August 5, 2007, GM, Delphi, and the IUE-CWA entered into a Memorandum of Understanding (IUE-CWA MOU) which provides terms that are similar to the UAW MOU with regard to establishing terms related to the consensual triggering of the Benefit Guarantee Agreement offering an additional attrition program, and continuing operations at certain Delphi sites for which GM committed to certain product programs. The IUE-CWA MOU is subject to ratification by the IUE-CWA members and approval of the Bankruptcy Court. The more significant items covered in the IUE-CWA MOU include (1) an additional attrition program offered to Delphi IUE-CWA employees,

 

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and (2) GM provision of future product programs at certain Delphi sites. These items are described more fully below.

 

(1) Delphi and the IUE-CWA agreed to an additional attrition program with terms substantially consistent with that previously offered to GM and Delphi employees as described in Note 7. GM’s financial contributions related to this additional program are currently being negotiated as part of a separate agreement with Delphi which has not yet been finalized (GM-Delphi Settlement Agreement).

 

(2) Delphi and the IUE-CWA agreed to continue operating certain Delphi sites at which GM will provide future product programs.

 

Under the GM-Delphi Settlement Agreement currently being negotiated, GM expects to provide Delphi with funding in the form of reimbursement of a portion of labor costs incurred by Delphi to produce systems, components and parts for GM. GM expects that this funding will result in future annual labor-related payments of between $300 million and $400 million which will be recognized as period costs as a component of Automotive cost of sales. Also, GM expects to provide cash support to certain Delphi facilities that are producing systems, components and parts for GM. GM expects that this funding will result in future annual facility cash support payments of approximately $100 million, which will be recognized in the future as incurred. In exchange for GM’s commitment to provide labor cost and facility support, GM expects to receive price reductions on certain products it has and will continue to purchase from Delphi. Any such funding as described and price reductions will take effect upon emergence of Delphi from Bankruptcy and extend for a period that is still subject to negotiation.

 

During the second quarter of 2007, as a result of finalizing the UAW MOU and current negotiations with Delphi on the GM-Delphi Settlement Agreement, GM recorded charges totaling $575 million to increase its estimated liability under the Benefit Guarantee Agreement with the UAW and to establish liabilities for certain commitments in connection with the Delphi reorganization plan.

 

On July 7, 2007, Delphi announced the termination of the December 18, 2006 Plan Framework Support Agreement with GM and a consortium of potential investors and the related investment agreement. On July 18, Delphi announced that it would seek bankruptcy court approval of an equity purchase and commitment agreement (EPCA) with a modified investor group led by Appaloosa Management L.P., which would be supported by GM as well as both of Delphi’s Statutory Committees. On August 2, 2007, the Bankruptcy Court as contemplated, issued an order approving the EPCA. Under the terms of the EPCA and the GM-Delphi Settlement Agreement, GM would release claims against Delphi in exchange for $2.7 billion in cash and an unconditional release of any alleged claims against GM by the bankruptcy estate. This recovery has been included as a reduction in the net loss accruals of $6.6 billion as of June 30, 2007. In addition, GM will assume up to $2 billion but not less than $1.5 billion of net pension obligations of Delphi, and GM will receive a note payable for the amount of the obligations assumed, which will be payable in cash by Delphi on market terms within 10 days after the plan of reorganization becomes effective. As with other customers, certain GM claims related to ordinary business would flow through the Chapter 11 proceedings and be satisfied by Delphi after the reorganization in the ordinary course of business.

 

In March 2006, Delphi also filed a motion under the U.S. Bankruptcy Code seeking authority to reject certain supply contracts with GM. A hearing on this motion was adjourned indefinitely by the court pending further developments related to Delphi’s U.S. labor agreements and retiree welfare benefits. Although Delphi has not rejected any GM contracts as of this time and has assured GM that it does not intend to disrupt production at GM assembly facilities, there is a risk that Delphi or one or more of its affiliates may reject or threaten to reject individual contracts with GM, either for the purpose of exiting specific lines of business or in an attempt to increase the price GM pays for certain parts and components. As a result, GM could be materially adversely affected by disruption in the supply of automotive systems, components and parts that could force the suspension of production

 

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at GM assembly facilities. The court order approving the UAW MOU also settled Delphi’s motion to reject the U.S. labor agreements with the UAW.

 

Since negotiations are not complete, the actual effect of the resolution of issues related to Delphi cannot be determined until the Bankruptcy Court’s approval of a comprehensive resolution and plan of reorganization, and there can be no assurance that the parties will reach a comprehensive resolution and plan or Bankruptcy court will approve such a resolution and plan, or that any resolution and plan will include the terms described above.

 

Benefit Guarantees Related to Divested Unit

 

GM has entered into various guarantees regarding benefits for former GM employees at two previously divested plants that manufacture component parts whose results continue to be included in GM’s financial statements in accordance with FIN 46(R), “Consolidation of Variable Interest Entities” (FIN 46(R). For these divested plants, GM entered into agreements with both of the purchasers to indemnify, defend, and hold each purchaser harmless for any liabilities arising out of the divested plants and with the UAW guaranteeing certain postretirement health care benefits and payment of postemployment benefits.

 

In October 2006, it was announced that production would cease at these two plants which would permanently idle 2,000 workers. Accordingly, during the fourth quarter of 2006, GM results included a charge of $206 million comprised of the following related to the closure of these plants: (1) a $214 million charge to recognize wage and benefit costs associated with employees accepting retirement packages, buyouts, or supplemental unemployment benefit costs in connection with the plant closure, (2) a curtailment loss of $3 million related to pension benefits, and (3) a curtailment gain of $11 million with respect to other postretirement benefits. During the three and six months ended June 30, 2007, GM recognized a favorable adjustment of $6.4 million and $9 million, respectively, related to the postemployment benefit reserve in connection with the plant closures. Additionally, during the six months ended June 30, 2007, GM recognized a $38.2 million curtailment gain with respect to OPEB, which was recorded in the first quarter of 2007.

 

 

Under Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” GM is required to adjust its effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. GM is also required to record the tax impact of certain discrete items (unusual or infrequently occurring), including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.

 

For the three and six months ended June 30, 2007, GM recorded net favorable adjustments to income tax expense of approximately $500 million, which resulted in the recognition of an income tax benefit for these periods. These favorable adjustments include: foreign income taxed at rates lower than 35% (U.S. federal statutory tax rate); various permanent book-tax differences; and discrete items such as the reversal of valuation allowances and the reversal of previously required tax liabilities in accordance with FIN 48 for uncertain tax positions now deemed more-likely-than-not to be realized.

 

Upon adoption of FIN 48 as of January 1, 2007, GM had approximately $2.7 billion of total gross unrecognized tax benefits, of which $2.1 billion represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. At June 30, 2007 the amount of gross unrecognized tax benefits and the amount that would favorably affect the effective income tax rate in future periods were

 

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$2.6 billion and $1.7 billion, respectively. These amounts consider the guidance in FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48”. At June 30, 2007, $1.4 billion of the liability for uncertain tax positions is netted against deferred tax assets relating to the same tax jurisdictions; the remainder of the liability for uncertain tax positions is classified as a non-current liability.

 

GM files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. In the U.S., GM’s federal income tax returns for 2001 through 2003 are currently under review by the Internal Revenue Service and, except for one transfer pricing matter, it is reasonably possible that this examination will conclude in 2007. A pre-filing meeting was held with the Internal Revenue Service on the transfer pricing matter in preparation for bi-lateral negotiations. GM’s Mexican subsidiary has recently received an income tax assessment related to the 2001 tax year covering warranty, tooling costs, and withholding taxes. In addition, GM is currently under review in Australia, China, France, Indonesia, India, Italy, Thailand, and Turkey, and has received notices that tax audits will commence in Germany, Portugal, Spain, and Taiwan. At June 30, 2007 it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits over the next twelve months.

 

GM has open tax years from primarily 1999 to 2006 with various significant taxing jurisdictions including the U.S., Australia, Canada, Mexico, Germany, the United Kingdom, Korea and Brazil. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses or the sustainability of income tax credits for a given audit cycle. GM has recorded a tax benefit only for those positions that meet the more-likely-than-not standard.

 

GM’s continuing practice is to recognize interest on uncertain tax positions in Automotive and other interest expense and penalties in Selling, general, and administrative expense. For the three and six months ended June 30, 2007, GM reduced accrued interest expense by $193.9 million and $179.8 million and accrued penalties of $3.3 million and $10.8 million, respectively. Interest and penalties of $81.9 million and $6.4 million were reversed for the three months ended June 30, 2007 as a result of the expiration of statutes in a number of countries as well as other amounts becoming effectively settled. In addition, interest income totaling $122 million was recorded in connection with the above mentioned transfer pricing matter. Accrued interest and penalties as of January 1, 2007 were $210.3 million and $75.6 million, respectively, and as of June 30, 2007 accrued interest and penalties were $42.9 million and $69.1 million, respectively.

 

In July 2007, new tax laws were passed or enacted in the United Kingdom, Germany, as well as in the State of Michigan, which will impact GM’s operations in these jurisdictions.

 

In July 2007, the United Kingdom enacted legislation to lower its statutory corporate tax rate from 30% to 28%, effective April 1, 2008.

 

In July 2007, the German Parliament passed legislation to lower its statutory corporate tax rate. It is anticipated that the President will sign the legislation, and it will become law sometime during the third quarter of 2007. The legislation provides for a reduction of approximately 9%, effective as of January 1, 2008, in the combined German statutory tax rate, which consists of the corporate tax rate, the local trade tax rate, and the solidarity levee tax rate.

 

 

The anticipated adjustments for Germany and the United Kingdom, which management is currently analyzing, will reduce the net deferred tax asset and increase income tax expense by a range of approximately $500 million to $700 million during the third quarter of 2007.

 

In July 2007, the State of Michigan enacted a substantial change to its corporate tax structure. The tax law change includes the elimination of the Single Business Tax (SBT) and the creation of an income tax and a modified

 

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gross receipts tax. The new taxes will be effective January 1, 2008. Due to the complex change in the tax law in Michigan, we are still evaluating the impact the change will have on GM’s result of operations and financial condition.

 

 

Basic earnings per share has been computed by dividing income (loss) from continuing operations by the weighted average number of shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Common shares potentially issuable under contingently convertible debt are included in computing diluted EPS using the average share price for the period similar to the treasury stock method.

 

The reconciliation of the amounts used in the basic and diluted earnings per share computations is as follows (in millions, except per share amounts).

 

 

Certain stock options with exercise prices that exceed the fair market value of GM’s common stock had an antidilutive effect and therefore were excluded from the computation of diluted earnings per share. The number of such shares not included in the computation of diluted earnings per share were 93 million and 107 million at June 30, 2007 and 2006, respectively.

 

GM has contingently convertible debentures of $2.6 billion principal amount of 5.25% Series B due in 2032, $4.3 billion principal amount of 6.25% Series C due in 2033 and $1.5 billion principal amount of 1.50% Series D due in 2009 outstanding that, if converted in the future, would have a potentially dilutive effect on GM’s common stock. GM has unilaterally and irrevocably waived and relinquished its right to use stock, and has committed to use cash, to settle the principal amount of the debentures if holders choose to convert the debentures or GM is required by holders to repurchase the debentures. GM retains the right to use either cash or stock to settle any amount that may become due to debt holders in excess of the principal amount for all outstanding convertible debentures. As of June 30, 2007 and 2006, shares potentially issuable under these debentures, including those shares issuable pursuant to the convertible note hedge related to the Series D convertible debentures, were excluded from the computation of diluted earnings per share as the effect is antidilutive under the treasury stock method.

 

On March 6, 2007, Series A convertible debentures in the amount of $1.1 billion were put to GM and settled entirely in cash.

 

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Depreciation and amortization, including asset impairment charges, included in Automotive cost of sales, Selling, general, and administrative expense, and Financial services and insurance expense were as follows: