Honeywell’s (HON) Pension Announcement a Smokescreen—It Does Impact the Firm and its Valuation

November 16th, 2010 by hackel Leave a reply »

Honeywell (HON) announced a change to its method of pension accounting whereby it will reflect changes in market value each year instead of the smoothing them, which helped show a healthier plan when market values were declining for Honeywell. Now that market values are rising, Honeywell is desirous of changing its methodology.  The company then revised its earlier results in conformity with the changes.

The following is important to bear in mind, whether for Honeywell or other firms sure to shortly announce stepped-up contributions:

The effects of the stepped-up contributions are real and many. Honeywell’s 2010 contribution of $1 billion with another $1billion contribution in 2011 are large in relation to the firm’s current and prospective free cash flows.

  • Such large contributions impact all facets of their business—operating budgets, supply chain, hiring, possible M&A, and capital spending.
  • Large contributions impact financial structure and credit
  • Stepped-up contributions tacitly admit past cash flows were overstated. This is why CT Capital currently makes these adjustments for any firm with significant underfunding.
  • The tag line “the contribution does not impact operating earnings“ is false. They do.
  • Large contributions may impact debt covenants.
  • Even with the large stepped-up contributions, the plans may still be severely underfunded—as Honeywell’s continue to be—see table below. For that reason, Honeywell, in its press release states: “it expects interest rate to increase”, which will help its discount rate. A 7% discount rate is not in touch with reality and thus one should expect such large contributions out of Honeywell to continue.
  • Honeywell speaks to its corridor. That will not impact the actual contributions that must ultimately be made.
  • A thorough analysis must be made of all such companies’ actuarial methods—from the ratio of retired to active employees to assumptions underlying the financial reporting. They truly impact market valuation.
  • See CT Capital’s  prior analysis where it indicated and pinpointed firms such as Honeywell and UPS (UPS) were sure to revise their pension funding


For additional information, contact Kenneth S. Hackel, CFA.

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Disclosure: No positions

Kenneth S. Hackel, CFA
CT Capital LLC

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If you are interested in learning more about cash flow, financial structure and valuation, order “Security Valuation and Risk Analysis” (McGraw-Hill, 2010).


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