GENERAL MOTORS CORP. 9/23/93 52-Wk-Rng FY/Q EPS93 EPS94 PE94 NxtQtr LyQtr General Motor 46.13 49-28 12/3 1.25 4.00 11.5 -0.50 -1.86 GM 52 Wk EPS P/E Ind. Range 1992 1993E 1994E 1993 1994 Div. Yield ===== ==== ===== ===== ==== ==== ==== ===== $50-$29 -$3.02 $1.25 $4.00 36.9X 11.5X $0.80 1.7% * Unfunded pension liability could approach $25 billion at yearend 1993. * Lower interest rates and union settlements will be the key factors. * No change in estimates at this time, but potential for negative impact on 1994 results. * Market performer rating unchanged. SHARP INCREASE IN UNFUNDED PENSION LIABILITY ANTICIPATED. Given the continuing decline in interest rates and early industry settlements with the UAW and CAW, earlier estimates of a $19 billion unfunded liability at yearend 1993 could prove too low. GM's unfunded pension liability was $14 billion in 1992. The latest indications suggest this liability could approach $25 billion at the end of 1993. Estimates are unchanged at $1.25 in 1993 and $4.00 in 1994. If the higher liability materializes, however, there could be a negative impact of $0.50 per share on the 1994 estimate. The success or failure of GM's restructuring efforts and future product program will dictate future operating performance. The magnitude and trend of GM's unfunded pension liability remains a concern, however, and could receive renewed attention. INTEREST RATE DECLINE ACCOUNTING FOR MAJORITY OF INCREASE. Under SFAS 87 (Employers' Accounting for Pensions), GM must change the discount rate it applies to plan obligations if there is a movement in the rate of long-term bonds. In the first quarter 10Q, management indicated that a 10 basis point drop in interest rates adds approximately $600 million to GM's projected benefit obligation (PBO). Given the drop in rates at that point, management stated that their 1992 discount rate assumption of 8.6% could be reduced to 7.6%. Correspondingly, they indicated that the unfunded pension liability could increase to $19 billion from $14 billion at yearend 1992 (there is a partial offset from the anticipated gain in plan asset values). With rates down 60 basis points since that time, the unfunded liability could be up another $3 1/2 billion to $22-$23 billion. The date for determining the benchmark interest rate level is September 30. UNION SETTLEMENT COULD ADD SUBSTANTIALLY TO PENSION OBLIGATION. Both Ford and Chrysler agreed to higher pension benefits in their respective settlements with the United Auto Workers and Canadian Auto Workers unions. Ford's benefits appear to be up 11% over three years and Chrysler's up 19% over six years. If GM accepts similar terms, the company's PBO could increase by another $3 billion - bringing the company's unfunded pension liability to roughly $25 billion at yearend. Analysts expect the UAW to accept the fact that GM must downsize. The question is how expensive they make it for GM and whether there is any compromise in areas like pension benefits. SHARP RISE ANTICIPATED IN 1994 PENSION EXPENSE. GM's pension expense was $2.0 billion in 1992. Analysts estimate pension expense of $2.5 billion in 1993 and $3.0 billion in 1994. If the unfunded pension liability does expand to $25 billion, rather than $19 billion, then the 1994 pension expense could increase by another $500 to $600 million (roughly $0.50 per share after- tax). The higher pension expense in 1994 would be a result of the increase in interest cost on the higher PBO (the cause of the higher unfunded pension liability). THE FUNDING OBLIGATION MAY PROVE TO BE MATERIALLY LESS THAN THE ACCOUNTING STANDARD INDICATES. SFAS 87 essentially dictates the discount rate that GM must use in measuring its PBO, specifically the rate on long-term single-A credit corporate bonds (currently at 7.0%). In determining future plan funding, however, GM believes that its long-term rate of return on plan assets (10.0%) is more appropriate and represents the "economic" reality of the situation. The impact is substantial because every 100 basis point increase in the discount rate translates into a $6.0 billion reduction in the PBO. If the unfunded pension liability (under SFAS 87) is $25 billion at yearend 1993, then the actual cash funding obligation with GM's 10.0% rate could be closer to $7.0 billion. If a 9.0% rate is used, then the unfunded liability is $13 billion and if 8.0%, then $19 billion. The key question is whether 10.0% is the appropriate long-term rate of return. FORD AND CHRYSLER IN MORE FAVORABLE PENSION SITUATION. At yearend 1992, Ford's pension funds were slightly overfunded. Chrysler had a $3.9 billion unfunded pension liability at yearend 1992, but an expected $3.1 billion pension fund contribution will reduce this substantially. The decline in interest rates will increase both of these company's PBOs, but both companies were using more conservative discount rates than GM's. Thus the impact should not be as significant.