(an example of what's coming...)
>Honeywell, for example, said Thursday that its pension fund deficit
could reach $1.7 >billion by year-end, and plans to contribute $900 million.
"We anticipate a >substantial portion of any such contribution would consist
of Honeywell stock," the >company
Pension fund equity charges rising
Analyst says charges could flag other balance sheet woes
By Leticia Williams, CBS.MarketWatch.com
Last Update: 6:45 PM ET Nov. 14, 2002
WASHINGTON (CBS.MW) -- Depressed equity markets, negative pension fund
returns and shrinking assets have companies shelling out big bucks to pad
employee retirement plans, a sign that could indicate further trouble down
the line.
The pension equity charges can flag inconspicuous dangers, says
Merrill Lynch analyst David Hawkins. The charges, which are becoming
increasingly common on balance sheets, can throw off debt ratios, triggering
debt covenant violations, he says.
Hawkins says the charge could also indicate "seriously" underfunded
programs in need of short-term help, as required by the Employee Retirement
Income Security Act, also known as ERISA.
Though such a charge has "no economically meaningful definition, it
should not be ignored," Hawkins wrote in a recent research note.
Investors take note: the charges not only reduce owner equity, they
also distort a key ratio used in company valuation.
"This way it could appear that a company's return on equity has gone
up, when in fact these charges make big demands on capital," Hawkins said.
Honeywell, for example, said Thursday that its pension fund deficit
could reach $1.7 billion by year-end, and plans to contribute $900 million.
"We anticipate a substantial portion of any such contribution would consist
of Honeywell stock," the company (HON: news, chart, profile) said.
There's a risk to investors, whether companies address the shortfall
with cash or stock. Cash could potentially affect dividends, debt
refinancing or asset growth, while stock contributions could cause dilution
of ownership.
Honeywell said a substantial amount of any contribution to its
retirement fund would consist of stock.
The company's shares fell as much as 14 percent Thursday before
recovering slightly to close at $22.95, down $2.31.
Pension equity charges have rarely appeared before on the balance
sheet, but negative fund returns have pushed companies to reveal the charges
to investors and analysts, and include them in filings with the Securities
and Exchange Commission.
In a filing, Ford Motor Co. (F: news, chart, profile) said Thursday
that it expects a pension shortfall of about $6.2 billion at year-end, and
intends to add $500 million to the plan in 2003 and 2004. See full story.
Local phone carrier SBC Communications also said Thursday that extra
benefit costs could reduce next year's earnings by 20 cents to 40 cents a
share. See full story.
Other companies shelling out to bolster pension funds this year
include some of the biggest of the big in Corporate America -- IBM (IBM:
news, chart, profile), United Technologies (UTX: news, chart, profile),
Boeing (BA: news, chart, profile), ChevronTexaco (CVX: news, chart, profile)
and Boise Cascade (BCC: news, chart, profile). |
