Gradient Analytics Identifies Public Companies with Outsized Accounting Pension Assumptions

The arcane rules related to pension accounting potentially cause funding shortfalls to be understated

Scottsdale, AZ – July 23, 2012 – Gradient Analytics, an independent global equities research firm and wholly owned subsidiary of Sabrient Systems, LLC, announced today the release of its fourth annual Pension Issue Commentary. The report is based on a thorough analysis of the accounting assumptions utilized by public companies’ pension plans and highlights those firms with plan characteristics that are unusual relative to the entire study population.

The 2012 pension study examines 354 publicly traded companies with as-presented pension liabilities of approximately $1.68 trillion and plan assets of $1.31 trillion at the end of 2011. Gradient Analytics continues to focus on the variation in the key assumptions used to estimate both the cost and carrying value of a firm’s pension liability for financial-reporting purposes.

“Our goal is to identify firms that we believe may face obligations that are substantially greater than the liability reported on their balance sheets. Additionally, we also look to identify a subset of firms in which we believe that the periodic cost of servicing pension liabilities may be significantly higher than reported in the statement of operations,” said Nick Gibbons, Senior Analyst and Associate Director of Research at Gradient Analytics. “The selection process yielded five new companies and one previously featured company that we believe may have the greatest disparity between the economic value of their pension obligations and the net liability reported and/or whose net periodic-benefit expense may be understated relative to our standardized accounting methodology.”

“Defined benefit pension plans have become a significant source of risk for many companies as returns on pension plan assets have not kept pace with the growth in pension plan obligations,” said Donn Vickrey, Director of Research at Gradient.

Previously featured companies have included AMR Corp. (AAMRQ) and Eastman Kodak Co. (EKDKQ). The companies featured in this year’s report include Allegheny Technologies Inc. (ATI), Consolidated Edison Inc. (ED), Northrop Grumman Corp. (NOC), Potlatch Corp. (PCH), R.R. Donnelley & Sons Co. (RRD, CO), and Weyerhaeuser Co. (WY).

Gibbons, who conducted the study and authored the report, provides specific details for each company’s pension plan and further reviews companies featured in prior studies. The research provides an assessment of companies whose earnings may be significantly at-risk under International Financial Reporting Standards (IFRS) pension accounting rules.  

“Our methodology places all firms on equal footing. As a result, the firms selected for analysis tend to be those that have set their expected return on plan assets and/or discount rate applied to measure plan liabilities at levels well above that of the median sample firm,” said Scott Brown, President at Sabrient. “We pride ourselves in our non-biased approach to research, and we have a great track record with this specific report.”

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PRESS CONTACT:
Cognito
Caitlin Mitchell
+1 646.395.6300
sabrient@cognitomedia.com

Notes to Editors

ABOUT GRADIENT ANALYTICS
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Founded in 1996, Gradient Analytics provides qualitative research for identifying long and short ideas and reducing stock-specific risk. Gradient's rigorous research methods are based on academic and proprietary studies in the areas of quality of earnings and corporate executive behavior. As part of Sabrient, Gradient Analytics includes:

  • Earnings Quality Analytics (U.S.) – comprehensive forensic-accounting, financial-statement, and corporate-governance analysis of widely held public companies.
  • Equity Incentive Analytics (U.S.) – actionable investment ideas based on the relationship between future earnings/stock-price performance and abnormal executive stock dispositions and stock-option behavior, as well as the relationship between performance and equity-incentive plan design
  • Gradient International (Non-U.S.) – in-depth research of forensic-accounting issues, foreign-exchange effects, domiciled market reporting and disclosure anomalies, valuation in light of sustainable earnings and balance-sheet robustness, corporate governance and executive behavior. Coverage includes the U.K./Western Europe, Japan, Canada, Australia, Hong Kong and developing countries in Asia, Latin/Central America, Eastern Europe and Africa.

ABOUT SABRIENT SYSTEMS, LLC
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Sabrient Systems, LLC specializes in unbiased, fundamentals-based quantitative equity research for the benefit of investment professionals, hedge funds, and self-directed investors. The firm analyzes nearly 6,000 U.S. and 2000 Canadian traded stocks and identifies those that appear poised to out-perform or under-perform the market. Sabrient first published its rankings in 2002, and its models have consistently outperformed relevant benchmarks over a broad range of investing styles, market caps, time frames and market conditions. Its long/short strategies have produced 10-year annualized returns ranging from 21% to 47%. Sabrient is based in Santa Barbara, California. Visit www.sabrient.com.