EAI's stock is being hit hard again, because their accounting practices are being criticized. An accountant at the SEC (Lynn Turner) and a writer for Barrons (Bill Alpert) have criticized DuPont, MCI, and EAI, among others, for charging-off all at once after a merger the acquired R&D, instead of amortizing these charges over a period of years.This issue has popped up elsewhere, always naming EAI.
This is a phony issue, though it has been getting a lot of publicity recently. The write-off of an intangible asset such as acquired R&D has no affect on a companies real assets or its cash flow-it is strictly a paper entry that has no affect on a company's operations or real profits.
This is not my opinion alone. Warren Buffet discusses this issue in the 1983 Annual Report of Berkshire Hathaway. He says there--and he has not changed his opinion since:
"We believe managers and investors alike should view intangible assets [such as acquired R&D] from two perspectives:
(1) In an analysis of operating results--that is in evaluating the underlying economics of a business unit--amortization charges should be ignored.
(2)In evaluating the wisdom of business acquisitions, amortization charges should be ignored also. They should be deducted neither from earnings nor from the cost of business."
It is unfortunate that accountants (including in this case the SEC), who generally speaking have never run a business, raise fusses about issues they really do not understand. Accountants are useful when their numbers represent business reality, and a nuisance when, as in this case, they insist on numbers that have no meaning in the real world.
Amortization charges of intangible assets should be ignored at EAI, and wherever else it occurs. Unfortunately, this phony issue is hurting EAI's stock price.
Lawrence Ladin, Aspen Colorado |
