(By Mani) NCR Corp.'s
) balance sheet could benefit from the recently passed transportation bill that includes a pension accounting change that could meaningfully improve the company's underfunded liability and valuation.
In recent months, the topic of "funding stabilization" has been a key concern of stakeholders in the private, single-employer defined benefit (DB) system. Funding stabilization refers to legislation that alters the calculation of the pension obligations that prompt funding of these pension plans.
The new provisions would increase the interest rates used to determine pension funding obligations for the next several years, after which valuation interest rates would likely revert toward the rates determined under current law.
The funding stabilization provisions would have a significant effect on the funded status of plans in 2012. Under any measurement, most of the promised obligations would be at least 60 percent funded in 2012.
A "Pension Funding Stabilization" measure in the transportation bill allows companies to change the discount rate used to calculate pension liabilities. The switch to a 25-year average of investment-grade corporate bonds from the current two-year average could improve NCR's underfunded status, lower cash contributions in the near term and provide room for a buyback.
"While still early, our initial analysis suggests NCR's underfunded status could be reduced by up to $700M, to $600M. NCR would also have an improved chance for an investment-grade upgrade," Oppenheimer analyst Ian Zaffino wrote in a note to clients.
NCR's US pension liability was $4 billion in 2011, and pension assets were $2.7 billion, suggesting a net underfunded status of $1.3 billion.
NCR, which assumed a 4 percent discount rate for its liability in 2011, estimates a 25 basis points (bps) change in the discount rate impacts its pension liability by $100 million to $110 million. A 6 percent discount rate could reduce the liability by about $700 million and bring the underfunded status to just $600 million.
"We further estimate cash contributions could be reduced by ~$50M from the company's 2013 estimate of $110M," Zaffino added.
Notably, the change could increase the funded status to 80 percent plus and remove the need to raise as much debt as originally estimated. However, the company should remove the plan from its books entirely and eliminate the possibility of another asset/liability mismatch, which landed it in this position in the first place.
Overall, the law could significantly improve NCR's balance sheet, valuation as it reduces debt and augments chances of returning to investment grade.
Founded in 1884, NCR is a leading manufacturer of ATMs, selfservice kiosks, point of sale (POS) devices to the financial, retail, travel, and gaming industries. The company has a 10.7 percent free cash flow yield, strong business momentum and several near-term catalysts, including the potential sale of the entertainment business, greater than expected synergies from recently purchased payment-systems software company Radiant Systems, and guidance that could prove to be low.