GY's operation is doing ok.
The problem is in its pension plan. It has to pay $130 million a year in benefits (last year it paid more). The payment is expected to decrease to $120 million within 10 years (this is a small decrease though).
The plan assets are worth about $1.3 billion. To support the payment, the assets will need to earn 10% in both interest and asset appreciation per year.
This is doable but very hard.
The company may be required to make cash contributions to the pension plan in the future, to satisfy government pension plan rules. This may (or may not) place a heavy burden on the company's future earnings and cash flow.
I am not sure how this problem will affect the debt covenant (except that it will affect it).
From the degree of declines of GY's price, it is clear that some funds are liquidating, as to avoid the risk.
Several posters on this thread had good observations and opinions about GY and the pension plan. Here's my take...
The pension plan appears underfunded due to poor stock market returns in recent years. However, this will self-correct over time. Why? Reversion to the mean. The stock market has historically returned around 10% annually (this long term return can be illustrated as a regression line on a chart). Today, the market is well below the regression line due to the severe bear market. History shows that the market will eventually catch up to the long term return and probably overshoot to the upside. Therefore, ignoring short term fluctuations, annual returns for the stock market will most likely exceed 10% over the next 10 years or longer.
What does this mean for GY? The pension shortfall will self-correct over the next few years as markets revert to the mean. IMO
I think they sold the $200 million convert to a bunch of hedge funds that shorted the stock before they covered by buying the convert. The stock slide started when they priced the convert and more shorts have piled on knowing there was already strong selling pressure. This type of decline, coming off a good quarter, has little to do with fundamentals or potential future liabilities.
The convertible bond was priced at $9 per share conversion price.
I have never seen such price drop after a company issues a successful conv bond offerring. In fact, I usually see price rise. The drop only started after earnings report; and bond offerring was done in mid December last year.
I agree the pension is a huge underlying problem. I think the stock movement is an overcorrection from an inflated price. There was never a reason for most of the price increase in last year. The Senate's jobs bill contains some funding relief for pension plans. It would buy companies like GY some more time before they had to start making up the principal of the asset losses from the market crash. It would give them a couple more years for the plan assets to catch up. Otherwise, mathmatics is an unforgiving mistress and contributions will be needed.
Sure. Good to know about the proposed government help.
GY's pension assets in fact reported a small loss during 2008 and 2009 (combined tens of million). The problem is, GY needs make about 10% of its pension assets as to pay its obligations. I read that California public teachers' pension has 20+% short fall if loss is realized today (the government pension accounting rules say you realize your gain or loss in years, not using mark to market).
The 10% return is doable with selected stocks I think. GY's prediction is 8%. The actual performance of GY's pension funds in last 8 years was 5.5% (not bad as we had a down market in equity), and we hope the next 8 years will be better.