David:
Hi - I just discovered SI a couple of weeks ago and looked for Avid since I had bought some when it was down around book value earlier this year. I couldn't help noticing that you have been a frequent contributor on this subject. You seem to know a lot about video editing and video editing systems - certainly more than I will ever know. I appreciated reading your various insights.
However, while I know next to nothing about editors, I do know a little about accounting, and I think that Avid's Accounts Payable increase in the first quarter could also be interpreted in a different way. I think what Avid actually reported in their news release (at least in the one I saw on the Business Wire) was combined Accounts Payable and Accrued Liablities up $8.6 million. This is a little bit of mixing apples and oranges, so I searched Avid's prior 10-Q reports and saw that this line was broken down in the 10-Q into separate lines for Accounts Payable and for Accrued Liabilities. Agreed, Accounts Payable are unarguably payments owed to suppliers, but Accrued Liabilities can be a lot of other things.
They typically include such mundane things as the cost of payroll owed (if the payroll cycle lags the calendar by a week or two weeks or month, depending on when employees get paid), and accruals for vacation time earned, but not taken. It also might include accruals for annual bonuses, profit sharing and sales commissions.
And it includes other accruals or reserves where the company knows or reasonably expects that it will incur a cost in the future. Accounting conservatism suggests that the company bear the cost now and accrue the amount taken until the cost is actually incurred (at which time you would credit expense and debit the accrual). In this way, a company can move expenses into an earlier period than that in which they are actually incurred.
This attribute of accruals allows a company (within reason) to increase apparent expenses in the current quarter if they don't want the results to look too good. Of course, it also allows them to make these same apparent expenses look smaller in future periods, which will make those results look better.
My point is - sorry it took so long to get to it! - is that it seems premature to jump to the conlusion that Avid was stretching out its suppliers in the first quarter to make its cash balances look better. It might be increases in Accrued Liabilities.
We'll know for sure when they file their 10-Q (which they have to do by May 15), but I note, from prior 10-Qs, that the last four quarters' Accounts Payable were:
Q1 1996 - $21.1 million
Q2 1996 - $25.6
Q3 1996 - $23.1
Q4 1996 - $25.3
As I just said, we'll know for sure shortly, but it seems strange to me that they would increase Accounts Payable in a quarter in which they were already getting $35 million in additional cash from Accounts Receivable, Inventory and Intel. I would think just the opposite actually: that they would use their cash strength to get better pricing from suppliers in exchange for faster payment, and thereby improve their margins.
Thanks again for your insights.
Marguerite |
