General Motors (GM) has amassed quite a stash of cash since taking the historic multi-billion-dollar bailout package it received from the federal government in 2009 to avoid bankruptcy. On Friday, it announced that it would use the money to help reduce its U.S. pension obligations by $26 billion. The news was welcomed by investors because it was a step in the right direction in dealing with the risks of the enormous obligations.
Specifically, the plan calls for about 42,000 salaried retirees and surviving beneficiaries to be eligible to receive a voluntary single lump-sum payment. In return, these retirees must agree to stop accepting monthly payments. GM will purchase a group annuity contract from Prudential Insurance Co., under which Prudential will pay and administer future benefit payments to most of the U.S. company's salaried retirees. The number of these retirees is about 118,000.
The transactions are expected to be completed by the end of the year, following completion of regulatory review, according to GM. Prudential will then assume responsibility for the benefits covered by the agreement and begin making the benefit payments in January 2013, the company added. There will be no change to the benefits to active employees.
GM also is creating a pension plan that it will fund that will cover salaried employees and some retirees that are not part of the 118,000 affected by the pension overhaul announced Friday. The amounts of the monthly pension payments will not change. GM's current salaried workers also will get the same benefits they would have received before the move.
The moves will cut GM's total U.S. salaried pension obligation from $36 billion to around $10 billion. These moves won't be cheap for GM. It anticipates spending between $3.5 billion and $4.5 billion to help fund the purchase of the group annuity contract and to improve the funded status of the pension plan for active salaried employees.
Furthermore, GM expects to be hit with net special charges in the range of $2.5 billion to $3.5 billion in the second half of 2012. The annual impact on the company's earnings is expected to be roughly $200 million as its pension income decreases. GM states that the final amount will be determined at the closing of the transactions.
From an investor's standpoint, I see GM's decision to use the cash it has accumulated to pay down its pension obligations as good news. They had been among the issues that remained sticking points after the government bailout in which GM received $49.5 billion. By taking these steps to de-risk its pension plans, the company can strengthen its balance sheet and have more financial flexibility as it moves forward in the competitive automotive market.
Ford (F) is also trying to shore up its pension obligations. Last month, it announced that it would begin offering lump-sum pension payouts to 98,000 white-collar retirees and former employees this summer. If successful, Ford's plan could reduce its $49 billion pension obligation by roughly 33%. Last month, Moody's Investors Service upgraded Ford to investment grade, which is a feat GM cannot celebrate yet.
At the same time that GM announced the pension plan changes, it also reported that its May sales represented its highest monthly sales in 33 months. They were up 11% year over year and totaled 246,479. GM joined its peers that make up The Big Three in reporting an increase in sales in May. Ford saw its sales increase 13% to 216,267 vehicles and Chrysler, a unit of Italy's Fiat (FIATY), saw its sales soar by 30%. The increases are important considering the increased competition the U.S. auto manufacturers are facing from foreign companies.
While GM's growth is impressive, Chrysler's must be highlighted as well. Chrysler last reported earnings in April when it announced its first quarter results for fiscal 2012. It reported that they had quadrupled to $473 billion. GM and Ford must not only contend with foreign automakers like Toyota (TM) and Honda (HMC). Chrysler, which I long considered the little kid on the block, is also a viable threat.
Chrysler, like GM, took federal bailout money in 2009, to the tune of $12.5 billion. Only Ford chose not to seek bailout money. Instead, it chose to stave off bankruptcy by raising $23.5 billion in liquidity. That included $18.5 billion of senior secured debt and credit facilities. The loan was secured by all of its domestic assets, including its famous Ford Blue Oval, its F-150 and Mustang trademarks, and $5 billion of unsecured convertible debt. Last month, Ford announced it had paid the loan back in full.
When GM reported its most recent earnings, which were also for the first quarter of 2012, it credited the recovering U.S. economy as being one of the reasons for its net revenues increasing. They increased by $1.6 billion to $37.8 billion.
The key to the company's continued recovery is the launch of new products in foreign markets, such as in South America and Europe. It's important for all of the U.S. automakers to be able to compete on U.S. soil and foreign soil.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
