%jMall Street August 24, 1 974 / William G. Shepherd, Editor The ‘hidden’ corporate debt The 20-month bear market has eaten so deeply into pension portfolios that it is beginning to pose a serious threat to corporate profits. As pension as sets decline, companies are faced with making larger and larger contributions out of pretax earn ings. Meantime, vested benefits—dollars that long standing employees have a claim to—keep rising. Some plans have already grown larger than their sponsor companies. And new legislation that’s due to pass Congress any day will increase vested ben efits further, as well as make companies legally liable for more of those benefits. That’s a blow, because $30-billion or more of the money isn’t there. The gap doesn’t represent cor porate negligence so much as promises that com panies haven’t yet had time to fulfill. When a pen sion plan is installed, or benefits are improved, the terms usually apply retroactively to cover employ ees’ previous service. This produces instant, large “past service” liabilities for the company—deferred wages that can be amortized over long periods, usually 30 years. But pension liability shows up only in footnotes in annual reports, not on balance sheets, so it repre sents a kind of “hidden debt.” The stock and bond market declines have just made matters worse. Scores of companies are deeply in hock to their pension plans. For some, the debt is so enormous it could impede their profitability, growth, and borrow ing power for years to come. Though pension liability promises to be a hot topic in investment circles, investors so far have little hard information to go on. As a simple rule, “companies that are fully funded,” says Robert S. Driscoll of Lord, Abbett & Co., which manages Affil iated and other mutual funds, "are going to be more r Unfunded pension liabilities: How big are they getting? i : ■ These examples show how much pension assets fell short of vested benefits last year, a debt that doesn’t appear on corporate balance sheets. “Percent of book value” reflects how much common shareholders would lose in equity if pension liability were capitalized. “Multiple of pretax profits” suggests how many years of a company’s earning power it would take to make up the deficit. To adjust a bit for cyclical swings and inventory profits, business week used a three-year average of pretax profits. Owed to pension Per share Percent of book Multiple of 1971-73 average pretax fund of common vaiuo profits ACF Industries (millions of dollars)' . . .$48.2. ‘ ....$3.57. 23.8% 1.3 Allegheny Ludlum . . .. 76.0.. .. . .16.02. 50.7 2.5 Allis-Chalmers .... . .. 93.0.. .... 8.78. 26.8 5.4 Ambac Industries .. . .. 15.1.. .... 3.60. 27.1 1.6 Am cord . . . 10.0.. .... 1.76. 16.1 1.5 American Brands .. ...101.5.. .... 3.96.. 21.6 0.4 American Can ..... ...278.0.. ....15.66. . ....42.7 2.5 American Motors ... . .. 80.0.. .... 2.95.. 23.8 2.0 American Standard ... 79.3.; .... 6.52.. 67.9 1.9 Anchor Hocking ... . .. 64.5.. .... 9.35., .....37.8 1.7 Armco Steel ...139.5.. .... 4.77.. 14.2 1.1 Beech Aircraft .... . .. 13.4.. .... 1.93.. 24.2 1.0 Bendix . . .116.8. . .... 9.15.. 29.9 1.4 Bethlehem Steel . . . . .758.0. . ....17.44. 33.8 3.0 Boeing . . . 93 0.. . . . . 4.39. 10.4 3.0 Hwdd . . . 70.0. . .. . .11.52. 38.7 2.6 Canadian Pacific • • . . 510.0.. .... 7.12. 28.9 3.2 Chrysler . . .583.0.. . . . .10.34. 21.0 1.6 Consolidated Edison . .207.0.. . . . . 3.36. 10.8 1.6 Crane . . . 97.Q.. . . . .18.99. 55.7 4.4 Curtiss-Wright .... . . . 34.5. . . . .. 3.95. . ....22.3 . 2.9 Eltra . .. 61.1.. .. . . 8.12. . ....24.6 . 1.3 Owed to pension Per share Percent of book Multiple of 1971-73 average pretax fund of common value profits (millions of dollars) Fairchild Industries ...$28.8.. .. . .$6.33. . ... .60.7% 1.9 Ford Motor .680.0.. .... 6.88.. ....11.1 0.5 General Motors .800.0.. . . .. 2.80. . .... 6.6 0.2 B. F. Goodrich . 60.3.. .... 4,22... .... 9.2 0.7 Goodyear Tire & Rubber .... 3.39.. . . ..14.5 0.7 Greyhound . 91.0.. .... 2.16.. ....26.0 0.7 Inland Container .17.8.. .... 6.01.. ....21,2 1.7 Interlake . 40.0.. ....10.72.. ....19.7 1.3 International Harvester.229.0.. .... 8.24.. ....17.8 v 2.0 International Paper .. .128.2. . .... 2.91.. ....11.4 0.8 Jones &. Laughiin Steel .191.0.. ....12.01 .. ,...26.9 3.8 Keystone Consolidated Industries . 40.0.. ....21.29.. ....42.3 10.6 Lockheed Aircraft ... .138.0.. ... .12.15. . ....48.7 5.7 Lukens Steef . 34.3.. .,..13.37... ...36.6 . 8.6 Marquette Cement Mfg. . 17.5.. .... 5.23. . . ...18.2 . 4.9 Midland-Ross . 27.6.; .... 4.88.. ....21.6 1.7 Mohawk Rubber . 8.8.. .... 8.07... ....34.1 . 1.5 National Steel .218.0.. ....11.79.. ....204 , 1.9 Raybestos-Manhattan . 20.2.. ....14,91... ...32.7 . 2.3 Remington Arms .... . 38.0.. .... 5.37... ...37.9 . 2.2 Republic Steel .346.0.. ... .21.39. . . ...31.3 . 5.3 Richardson . 6.9.. .... 4.36. . . ...297 . 1.0 A. O. Smith . 31.0.. .... 6.29... ...18.0 1.3 Unlroyal .421.0. . .. . .15.85 . . ...78.2 . 5.6 Western Union .228.0. . . . . .16.61 . . . ...41.3 . 7.6 Westlnghouse Electric .431.0. . . . . . 4.90... ...24.3 . 1.3 Wheeling-Pittsburgh Steel .186.0.. ....50.93... ...642 . ....10.7 White Motor . 75.0.. .... 9.11... ...33.2 . 3.8 Youngstown Steel Door 6.2.. .... 4.81. .. ...28.5 . 3.4 Data: Arnold Bernhard & Co.; Investors Management Sciences; business week 46 BUSINESS WfctK: August 24, 1974 WAl L STREET