Accounting games - some of these are real cute.......
This sort of articlel is one of the reason I love TheStreet.com -
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Personal Finance : Lisa Meyer
Hiding Cooked Numbers Behind the Disaster
By Lisa Meyer
Editor
10/01/2001 12:45 PM EDT
Sept. 11 deserves the blame for a lot of things -- but not everything.
As corporate America nears the end of the third
quarter and profit warnings start rolling in, a large
number of companies are citing the tragic attack on
the World Trade Center and the Pentagon as the
reason for ratcheting down earnings expectations.
But look more closely. While it's valid in many
cases, some of those companies may be using the
terrorist attacks as a smoke screen for previously
existing fundamental problems.
To help dissipate that smoke screen, the Financial Accounting Standards Board
[FASB] recently reversed an earlier decision to allow companies to regard costs
related to the disaster as extraordinary and include them as a separate item on
their financial statements. Instead, companies must account for these expenses
as routine costs. In effect, this decision prevents companies from showing how
much the disaster affected their earnings on their income statements.
But the FASB can't control what firms tell the public in earnings announcements.
While the board's decision prohibits companies from breaking out the cost of the
attacks as a separate line entry called an "extraordinary item," companies face
little or no regulation in what they can say in the body of a press release. Many will
presumably adopt pro forma treatments that purport to isolate earnings before the
effect of the terrorist attacks, and therein lies the possibility for doctored numbers.
"Some companies will try to use the attacks as an explanation for bad
performance," said Dan Kasper, analyst at LECG, an economic consulting firm.
"Look at each case on its own merits."
The Obvious
Take the most obvious example: the airline industry. Certainly, an unprecedented
grounding of aircraft immediately following the attacks, increased security
requirements and skittish air travelers -- all the result of the terrorist activity -- will
hammer airline companies' bottom lines.
But many carriers were struggling before the attacks because of decreased
business travel, an overcrowded sector and poor business models. Some
companies teetered on the brink of bankruptcy. Just before the attacks, Midway
filed for Chapter 11, which gives companies a chance to restructure. On Sept. 12,
the airline company filed for Chapter 7, which requires a firm to liquidate.
The $15 billion in federal aid to the airline industry pushed other companies back
from the brink. The federal government intended the $5 billion cash part of the
package to compensate the airlines for losses during the month of September, said
Scott Gibson, analyst at Simat Helliesen & Eicher, a financial and aviation
consulting company. "It didn't make them healthy."
A second part of the federal aid package, the $10 billion in loan guarantees, is
being hotly debated in Congress. Some airlines were in such jeopardy on Sept. 10
that they didn't have access to capital markets. "The loan guarantees shouldn't give
these companies access now," said Gibson.
Even though it is too early to tell if the federal bailout changed the long-term survival
odds of some airlines, the recent crisis has called the industry's financial model
into question. "The airline business is highly leveraged," says Kasper. "It has a
high debt-to-equity ratio. That tends to increase vulnerability under highly adverse
circumstances. It doesn't call into question the health of the industry. But it does
call into question whether this is a sustainable financial structure."
Kasper says airlines have never been a good long-term investment, "with one
exception: Southwest (LUV:NYSE - news - commentary - research)." The no-frills
carrier uses short jaunts across the country to avoid congestive airports, and it
nearly always fills its planes.
The Obscure
Now let's take two less obvious examples.
A week after the terrorist attacks, Kodak (EK:NYSE - news - commentary -
research) lowered its third-quarter earnings to 65 cents per share, compared with
an earlier guidance range of 90 cents to $1.20 per share. The company attributed
the reduction to a slowing economy and negative effects from the terrorist attacks.
Less leisure travel from scared consumers does result in less picture-taking. But
Kodak struggles with other problems. Its health imaging business is faltering. The
increasing number of group-purchasing organizations, which act as buyers for
multiple hospitals, has decreased prices for medical images and, as a result,
Kodak's revenue. During its second quarter this year, Kodak earned $1.12 per
share, compared to $1.65 per share a year earlier, according to Thomson
Financial/First Call.
In addition, the conventional photography company is struggling to make a
transition into the digital age. "If people weren't so worried about digital cameras
reducing the demand for film, this company would be trading at a higher price,"
says Peter Ausnit, an analyst at Deutsche Banc Alex. Brown. "Within the next
several years, the use of film will decline."
Elsewhere, Impath (IMPH:Nasdaq - news - commentary - research), a provider of
cancer diagnostic information, ratcheted down its third-quarter earnings, projecting
23 cent to 24 cents, which falls short of the 27 cents analysts predicted. Like
Kodak, Impath cited the terrorist attacks as a cause.
The Manhattan-based company did have difficulty receiving tissue samples
because of the ban on air travel immediately following the attacks. A couple of
days' lost work represents 3% to 5% of revenue per quarter, points out Ruby
Holder, analyst at ABN Amro.
But Joel Ray, analyst at First Union Securities, recently downgraded Impath's
stock because the company is having difficulty collecting money from clients.
Impath recently appointed a new executive to focus on accounts receivable, and
the company has made some improvement in this area, says Ray.
The decline in days sales outstanding [DSO] for the company's 2001 second
quarter did decrease to 118 days from 123 days in the previous quarter, according
to a statement issued by Impath's COO, Richard Adelson.
"If the company continues to make progress on its DSO, it will have a positive
stock," says Ray. "If it can't, it won't." |
