GM to Post $23-Billion Loss to Deal With Retiree Benefits
General Motors said Monday it will take nearly $23 billion in charges against 1992 earnings to account primarily for retiree health benefits--a move that guarantees that the crippled auto maker will post the biggest one-year loss ever by a U.S. corporation.
The announcement, capping one of the worst years in GM’s history, is the most dramatic yet as accounting rules force companies to face up now to the future costs of caring for the nation’s aging baby-boom population.
Companies like GM--with older work forces and lots of retirees--will report the largest such write-offs, which slash what companies are worth on paper but generally do not affect the value of stockholders’ shares or the firms’ economic condition.
General Motors executives emphasized that the accounting charge will have no impact on GM’s day-to-day activities; indeed, GM expects to break even this year on its North American operations.
“We’re the biggest company, we’re a mature company and we historically have had high levels of benefits for both employees and retirees,” GM spokesman Mark A. Tanner said. “We’re the biggest, so this might be expected.”
The write-offs can affect employees and consumers. Some companies have raised prices on products to offset the higher health care costs. A growing number of corporations, such as McDonnell Douglas, also have moved to reduce future health benefits for retirees.
The charges also underscore the heavy toll health care costs are taking on the U.S. economy. Car makers have been among the leaders in a corporate push for health care reform; GM gave the White House an advance briefing on its announcement.
“The spiraling rate of increase for health care costs places GM at a significant competitive disadvantage relative to other vehicle and component manufacturers who have younger work forces, fewer retirees or different benefit-plan designs,” said Chief Financial Officer G. Richard Wagoner Jr.
Because of the charges, GM will report a loss of about $23 billion, which would shatter the previous record annual loss for a U.S. corporation--the $4.96-billion deficit posted only two weeks ago by IBM.
Analysts had already been predicting a loss from operations of at least $1.2 billion, or $1.72 a share, for GM in 1992. The charge for retiree health benefits will add more than $33 per share to any operating loss.
Previously, corporations could account for non-pension retirement expenses as they occurred. But a new rule imposed by the Financial Accounting Standards Board requires firms to show such promises as a liability on their balance sheets, even though they are not actually paying out the money yet.
As a result of the new rules, corporations nationwide have been scaling back, and in some cases eliminating, retiree health benefits in an attempt to reduce their liabilities.
Ford Motor Co. late last year took a $7.5-billion charge to comply with the new rule. Other firms that have announced big charges--or are expected to--include Sears Roebuck, Rockwell International, American Telephone & Telegraph and Eastman Kodak.
The huge loss at GM comes on top of a year of tumult, as the giant auto maker launched headlong into the process of retooling itself to keep up with its competitors.
Outside directors staged a boardroom coup in October, forcing out Chairman and Chief Executive Robert C. Stempel. The company announced plans to close 21 plants, reorganized entire divisions and committed itself to cutting 20,000 jobs from its U.S. white-collar work force.
A total of $20.8 billion of the after-tax write-off, or $33.38 per share, is a “transition” charge to recognize the costs that GM would have recorded had it steadily accounted for benefit expenses as if the new rule had always been in place. GM had the option of taking the charge at one time or amortizing it over 20 years.
“We elected to immediately recognize the transition obligation in 1992 in order to get the expense . . . behind us,” Wagoner said.
Wagoner said GM retirees would not notice any difference in their benefits as a result of the change.
GM is taking another $1.4-billion after-tax charge for the cost of such benefits in 1992. The company now will be required to take a charge each year for such benefits; GM has estimated that the write-off will range between $400 million and $2.6 billion a year.
“It’s important to understand that this accounting change, while certainly significant in highlighting the seriousness of GM’s retiree-health-care-cost problem, does not affect GM’s current cash flow,” Wagoner said.
The charge also will not affect the company’s ability to pay dividends, he said. GM directors on Monday approved an 11% increase in the Class E common stock dividend to 10 cents per share and voted to keep dividends at present levels for its other two classes of common stock.
Besides the charge for retiree benefits, GM is taking an unexpectedly large fourth-quarter charge of $744 million after taxes, as part of a restructuring of its National Car Rental Systems subsidiary.
Despite the huge, unprecedented losses and continuing erosion in its share of the automotive market, GM officials looked to the future hopefully on Monday.
Wagoner said the company is “encouraged by recent trends in our North American operations.” The firm is predicting that those operations will break even in 1993--before interest, taxes and the coming year’s retiree benefits charge.
