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How Boeing Could Mitigate Pension Impact?

 November 20, 2012 01:13 PM

(By Mani) Boeing Co. (NYSE: BA) has the largest pension expense headwind in the US defense sector. The 2013 impact has yet to be finalized, but Boeing has estimated that it would see a $1 billion, or 88 cents a share, headwind from pension expense next year, with a total pension cost of $3.5 billion. As of its most recent filings, Boeing has a pension shortfall of about $15.5 billion.

Recent comments from Boeing management suggest there could be see some action to improve the pension situation within the next couple of months.

"Boeing could just ignore its pension cost from year to year, and provide an "adjusted" non GAAP EPS number (and guidance) excluding pension," RBC Capital Markets analyst Robert Stallard said in a note to clients.

[Related -General Electric Company (GE) Q4 Earnings Preview: Feeling The January Effect]

This is what General Electric Co. (NYSE:GE) has done.

Another option is Boeing could take a more radical route of shifting to mark to market accounting for pension returns, shifting billions of dollars of future pension expense into the past. This is a tactic that Honeywell International, Inc. (NYSE:HON) has taken. The implications of adopting either option are not guaranteed.

"In our view, pensions are a real cost to the company, and if they are excluded it opens the door for further exclusions based on management discretion," Stallard noted.

[Related -United Technologies Corporation (NYSE:UTX): How Pension Shift Will Drive EPS?]

The mark to market maneuver would be a big shift, requiring extensive restatement of historical results. Boeing's pension liability is substantial, and the volatility that mark to market brings may be inappropriate. However, this move would be highly accretive to 2013 and 2014 EPS estimates, and probably help the stock price.

"It is also worth noting that this would probably not have any impact on Boeing's cash contributions to its pension plans," the analyst said.

Pension could be a catalyst. Although it is unclear what Boeing will do with its pension situation, expectation of a change could be a potential positive catalyst for the stock. This would be in tandem with the expectation that Boeing is set to announce a significant increase in cash deployment in the same time frame.

"We think these two issues are important for the stock, as without them the EPS profile for 2013 and 2014 is lackluster, at the same time as the book to bill for Commercial Aircraft looks likely to dip under 1x," Stallard added.

Boeing recently reported a 6 percent drop in profit for the third quarter, as a 13 percent increase in revenue was offset by higher pension expenses. Net earnings decreased to $1.03 billion or $1.35 per share from $1.10 billion or $1.46 per share in the prior year. Boeing said higher pension expense of 18 cents per share more than offset increased earnings at Commercial Airplanes as well as Defense, Space & Security businesses. Total revenues grew 13 percent to $20.01 billion from $17.73 billion a year earlier. 

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