Key facts about GM-UAW tentative contract agreement

[Oracle of Delphi]

Philip Nussel

Automotive News

September 26, 2007 - 5:19 am EST

UPDATED: 9/26/07 4:23 p.m. EDT

Here is the situation at General Motors in North America:

* Talks: GM and the UAW announced a tentative contract settlement at 4 a.m. EDT.

* Employees: About 73,000 hourly workers represented by the UAW are expected to return to work today by the afternoon shift.

* Approvals: Any agreement must be ratified by the UAW rank-and-file. UAW local leaders could meet as early as Friday morning to discuss the tentative pact. If ratification is completed, the deal would then be subject to court approval and GM must get regulators to approve how it accounts for the contract changes.

* What GM got: Will shift more than $50 billion in health care liabilities to a UAW trust fund; more productivity in U.S. plants; lower tier-two wages for new hires in certain areas such as janitorial and truck unloading. GM also won revisions in the controversial Jobs Bank program in which laid off employees continue to receive pay for indefinite periods, according to multiple media outlets.

* What the UAW got: Guarantees of new plant investments in the U.S.; a health care benefit trust that will remain solvent for 80 years; GM will permanently hire up to 5,000 temporary workers; signing bonuses to UAW members to approve the contract; and wage increase of 3 percent in the second year, 4 percent in the second year and 3 percent in the third.

* What GM will pay: GM, according to analysts, will fund the health care trust fund at 70 percent of its long-term liability. That amounts to about $35.0 billion. GM has not confirmed that figure.

* What's next: The UAW will decide as early as Thursday whether it will choose Ford Motor Co. or Chrysler LLC as the next target for contract negotiations, Reuters reported.

* Wall Street: GM shares closed up $3.22 a share, or 9.36 percent, to $37.64 a share on the New York Stock Exchange. Volume was four times as heavy as usual, with 66.2 million shares trading hands by 4 p.m. EDT.

[Newbiewar]

signing bonuses to UAW members to approve the contract; and wage increase of 3 percent in the second year, 4 percent in the second year and 3 percent in the third.

you have 2 wage increases for the second year... assuming its 3% first 4% second 3% third?

[ZL-1]

What GM will pay: GM, according to analysts, will fund the health care trust fund at 70 percent of its long-term liability. That amounts to about $35.0 billion. GM has not confirmed that figure.

Replacing $50bn in healthcare liabilities with $35bn in bank debt represents a gain of $15bn.

I'm not sure what US GAAP treatment of this is: is the $15bn gain recorded on this year's P&L, or does it go to an accruals/deferrals account to be recognized over a number of years?

[Newbiewar]

Replacing $50bn in healthcare liabilities with $35bn in bank debt represents a gain of $15bn.

I'm not sure what US GAAP treatment of this is: is the $15bn gain recorded on this year's P&L, or does it go to an accruals/deferrals account to be recognized over a number of years?

not really... its a lot more then that

this 50 billion

has to provide for UAW for the next 80 years

its the UAW job to invest it right and save it so their members can count on that health care

[ZL-1]

not really... its a lot more then that

this 50 billion

has to provide for UAW for the next 80 years

its the UAW job to invest it right and save it so their members can count on that health care

I believe these $50bn are the NPV of future expected healthcare liabilities, right? If you pay $35bn to get rid of a liability of $50bn, you have to account for that $15bn gain somehow, correct?

I was only asking how that works with regard to US GAAP, since I don't work with your standards: does one recognize the gain in one go, or use accruals/deferrals?

EDIT - From FAS 145 it follows it is accounted for as 'extraordinary item' or 'unusual item'. My reading leans to recognizing it in one go (I didn't check the APB Opinion related to it), so this will show up in GM's income statement in one of the next few Qs.

Edited September 27, 2007 by ZL-1

[Newbiewar]

I believe these $50bn are the NPV of future expected healthcare liabilities, right? If you pay $35bn to get rid of a liability of $50bn, you have to account for that $15bn gain somehow, correct?

I was only asking how that works with regard to US GAAP, since I don't work with your standards: does one recognize the gain in one go, or use accruals/deferrals?

EDIT - From FAS 145 it follows it is accounted for as 'extraordinary item' or 'unusual item'. My reading leans to recognizing it in one go (I didn't check the APB Opinion related to it), so this will show up in GM's income statement in one of the next few Qs.

i think your mistaken with this...

expenses are not like assets and are not taxed as such... you dont profit from expenses, they are just deducted from overall earnings... thus a tax write off...

so in essance GM's not going to get as big a tax write off as they had previous years, but... tax write offs are not nearly as good as never spending the money in the first place so... after about 4-5 years GM will break even as if they had not had the one time lump sum of 35 billion, but after that... it frees up their cash flow considerably... like bob lutz was saying in 5 years they will be the most profitable auto manufacture...

you dont have to show anything for that 15 billion if i understand this correctly...

sure this will be a one time expenses that will look terrible on income statements... a few years ago GM was preparing to pay almost 8 billion per year on health care contracts... this 35 billion will do a lot for their books... at least the longevity...

but like the UAW catapiller reitires are concerned for the UAW of GM because they got a veba in 98 and after 6 years the money was depleted...

[ZL-1]

My understanding is the cash outflow of $35bn will not be expensed in the P&L, but the difference between the $50bn and the $35bn will be recognized as a gain from debt reduction in the P&L. I have no idea re the tax treatment: trying to navigate through Tax Law complexity in Portugal is more than enough for me

It will free upcash flow in the future, and that's the main point of a deal such as this. Just out of dumb simplicity: $50bn equals some 10 Lambda platforms worth of development money, perhaps?

Again, that's the interesting result from the agreement. My question comes out of curiosity as to how it will be presented in the accounts :AH-HA_wink:

Edited September 27, 2007 by ZL-1

[Newbiewar]

My understanding is the cash outflow of $35bn will not be expensed in the P&L, but the difference between the $50bn and the $35bn will be recognized as a gain from debt reduction in the P&L. I have no idea re the tax treatment: trying to navigate through Tax Law complexity in Portugal is more than enough for me

It will free upcash flow in the future, and that's the main point of a deal such as this. Just out of dumb simplicity: $50bn equals some 10 Lambda platforms worth of development money, perhaps?

Again, that's the interesting result from the agreement. My question comes out of curiosity as to how it will be presented in the accounts :AH-HA_wink:

my thinking is it will appear as a onetime expense similar to the buyout of 30k employees... its the same thing... in my opinion and the same thing as far as taxes are concerned... i beleive...