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Honeywell (HON) Pension Accounting

November 17th, 2010 Comments off

(The comment below does not constitute an opinion as to the valuation of Honeywell (HON) common stock—only its pension accounting.)

However, for investors who make buy/sell decisions on the basis of P/Es or other accounting conventions, the news out of Honeywell was certainly good. For 2011, the firm, based on information released yesterday, expects to accrue a $200MM expense on its P&L, despite an actual cash contribution into its pension plans of $1 billion. Its shift to mark-to-market helps during periods of rising asset values.

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

November 16th, 2010 Comments off

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.

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Pensions-Buyer Beware-These Firms Exposed to Greater Risk

July 15th, 2010 Comments off

Pension plans are making news-from local and state governments to large corporations. They are being cut back, eliminated or, for many, in trouble without the workforce recognizing the extent of the problem.

Most firms have been forced to prop up their plan’s health with additional cash contributions, while many other firms are simply hoping the financial markets, as they did during 2009, will bail them out.

Meanwhile, for others, the plans are so underfunded, it is just a matter of time before the inevitable takes hold-larger than expected contributions or a bailout by the Pension Benefit Guaranty Corp. Those firms have been able to make it this far due to overzealous actuarial assumptions which have moderated the true liability. However, with both stocks and hedge fund performance below zero the past three years, which firms stock prices are the most vulnerable?

The list below shows the bottom 20% of that S&P grouping, with each firm on the list underfunded to the extent such amounts to at least 5% of both their total debt (including capitalizing the operating leases, shown as a separate column), and 5% of its current stock price.  Many are in much more precarious position, as is shown.  In addition, each company on the list has both an expected return on plan assets and a discount rate at least equal to the market average. Of the S&P group of companies, the average investment assumption is 8% and the average discount rate 5.8%, both of which is presently too high and understates the true liability confronting firms with defined benefit plans. The firms on the list have expectations greater than that! Also shown are last fiscal year’s plan contributions, benefits paid and projected benefit obligation (PBO).


The PBO is the actuarial present value of all benefits earned by an employee as of a specified date for service rendered prior to that date plus projected benefits attributable to future salary increases. Indicated is the funded status of a pension plan as either overfunded or underfunded, however, all of these firms plans are currently underfunded as of their latest fiscal.

The underfunded status of defined as the sum of:

  1. Pension – Long Term Asset

minus the sum of

  1. Pension – Current Liability
  2. Pension – Long-Term Liability

Accumulated pension plan benefits are reflected at present value to remain on a comparable basis with plan assets. The assumed rate of return on assets is the discount rate used to arrive at the present value of plan benefits.

If the financial market does not bail these firms out, the alternative could quite well be additional significant  and currently unforeseen contributions which will impair reported and expected earnings, cash flows, return on invested capital, and cost of capital.

I would strongly urge all investors in these firms to thoroughly review the actuarial soundness of their plans as this represents significant  risk that can be avoided prior to the headlines.

Disclosure: No positions

Kenneth S. Hackel, C.F.A.
President
CT Capital LLC

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