=DJ CSFB: 26 Cos. May Take Big Pension-Related Hits To Equity
10/11/2002
Dow Jones News Services
(Copyright © 2002 Dow Jones & Company, Inc.)
By Michael Rapoport
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Twenty-six companies in the Standard & Poor's 500-stock index may suffer big reductions in their shareholder equity in the months ahead related to anticipated underfunding in their pension plans, according to a Credit Suisse First Boston report.
The report, by CSFB accounting analyst David Zion, estimates that each of the 26 companies - including heavyweights like International Business Machines Corp. (IBM) and Ford Motor Co. (F) - will see their shareholder equity reduced by at least 25% because of charges to equity tied to pension underfunding.
These reductions wouldn't affect income or cash flow, and they don't pertain directly to company contributions to pension plans. Indeed, some of the 26 companies aren't currently required to make contributions to fund their plans; the criteria for when companies must make their contributions are handled separately from the accounting rules that require the charges to equity.
But the reductions in shareholder equity would weaken the companies' balance sheets, and Zion notes that S&P, for one, is looking at them - it's evaluating the potential impact they could have on debt covenants, he said.
"(A)s the health of a defined benefit pension plan deteriorates, some companies might have to adjust their balance sheets to reflect (a) minimum pension liability," Zion wrote in the report. He couldn't be reached for further comment.
Under accounting standards, companies run into balance-sheet problems when their pension plans are so underfunded that they don't have enough assets to meet their "accumulated benefit obligations," or their future obligations to their retirees measured at current salary levels. Pension underfunding is typically measured using future salary levels, which would be higher, so if a plan can't meet its obligations measured at current salary levels, it's significantly underfunded.
That requires the company to add a liability on its balance sheet, which has the effect of reducing shareholder equity, which is assets minus liabilities.
The matter had started coming to light even before the CSFB report. Delta Air Lines Inc. (DAL), for instance, one of the companies on the CSFB list, said last month that it would have to take a charge to equity tied to pension underfunding that would be big enough to trip one of its debt covenants. Some other companies on CSFB's list, like Allegheny Technologies Inc. (ATI), have said in their regulatory filings that they expect to take reductions in shareholder equity tied to their pension plans.
Using CSFB's methodology, the firm estimates, for instance, that IBM will have to take a $7.8 billion reduction in shareholder equity, or 33% of its $23.6 billion shareholder equity as of the end of 2001. IBM declined to comment.
Ford would have to take a $3 billion reduction in equity, 39% of its $7.8 billion in equity as of the end of 2001, according to CSFB's estimates. But Ford spokesman David Reuter said that the company would "likely" not have to take a charge and that "the status of our pension liability is really no different than many other public companies this year."
Andy Campbell, the chief financial officer of Pactiv Corp. (PTV), another company on CSFB's list, called the charges to equity "frankly a technical adjustment." Pactiv does anticipate having to reduce shareholder equity, he said, but the company doesn't expect to have to put any more money into its pension plan.
Michael Schirk, vice president and treasurer at Equifax Inc. (EFX) and the investment officer of its defined benefit pension plan, called CSFB's analysis "pretty theoretical" and "highly speculative," and said that whether Equifax would see a reduction to equity would depend on how well its pension plan performs by the end of the year.
Tom Glover, a spokesman for ITT Industries Inc. (ITT), said "the subject is under review" at ITT, and the company will finalize its accounting for it at the end of the year. He wouldn't comment on whether ITT expects to take a charge to equity, as CSFB suggests. Some other companies on the CSFB list denied that they would have to take charges to equity.
The other companies on CSFB's list are Maytag Corp. (MYG), TRW Inc. (TRW), United States Steel Corp. (X), General Motors Corp. (GM), Hercules Inc. (HPC), Unisys Corp. (UIS), Xerox Corp. (XRX), Cummins Inc. (CUM), Navistar International Corp. (NAV), Kellogg Co. (K), Black & Decker Corp. (BDK), NCR Corp. (NCR), Eastman Kodak Co. (EK), Yum Brands Inc. (YUM), Boeing Co. (BA), Colgate-Palmolive Co. (CL), Lockheed Martin Corp. (LMT), Ball Corp. (BLL) and Raytheon Co. (RTN).
- Michael Rapoport, Dow Jones Newswires; 201-938-5976;
michael.rapoport@dowjones.com
(Sonoko Setaishi, Dinah Wisenberg Brin, Richard Gibson, Desiree Hanford
and Peter Loftus contributed to this story.)
(END) DOW JONES NEWS 10-11-02
04:34 PM |
