ANALYSIS OF Q3 97 and FY 97 RESULTS
(press release, link)
biz.yahoo.com (please print out or look at it in another window)
Following is an edited summary of my post at SI. The 10K should be out any time now.
My analysis is based on the resent press release and old SEC fillings. The 10K will probably come out in mid-march. The press release numbers are tricky, just disguised garbage. These guys are playing naive games [assuming investors including the big funds can read through the Financial statements]. First, take a look at the 10Q Income Statement (IS) for Q3 97.
sec.gov
You need to look at it so that you understand the points I will make:
First, notice that Operating Income is not the same thing as Income Before Extraordinary Items; Operating Income is taken before interest expense AND extraordinary items. There is also the concept of Results Before Extraordinary Items, the number the street loves. The rationale being this love is that extraordinary charges are non-recurring items [supporters of EVA analysis argue that this charges actually reduce asset base and are a "trick to sweep under the rug" the charge as a "one time hit" which is not included in the calculation of future performance measures such as return on assets. This is what Herb Greenberg of the street.com would call a sani-flush]
So we have discussed three concepts:
Operating income: this is taken before interests and extraordinary items. 2. Results before extraordinary items: Consider operating income and interest expense but exclude extraordinary items.3. Net Income after taxes: the bottom line! The important number. [Cash flows are more important . but item 3. is definitely more important than 1. and 2.]
In the 97 Q3 results we see that operating income was a bit under one million while the net interest expense was an amazing 10+million! and we see that the EPS number they report of (0.60/share) can be considered a loss before extraordinary items. As we see, interest expense kills them! Sure, the recent refinancing at lower rates will help but as we will see from the limited information in the press release, this came at a cost [a huge extraordinary charge!]
Now, let's sink our theeth on the new release: First let's look at the Q4 "massaged" Income Statement [a lot of details missing vis-a-vis what we would see in a 10Q/K]. A good idea is to always look at the numbers before reading the glossy management comments.
Lee S. Hillman, President and CEO stated, ''The Company's fourth quarter operating income of $9.6 million and loss from operations of $.2 million, or $.01 per share, were better than all published Wall Street estimates as well as our own plan.'' As far as I am concerned, the CEO is comparing apples with oranges, the consensus number from Zacks is -$0.17/share which can be considered "Expected EPS BEFORE extraordinary items". The 0.01/share operating income was mainly due to the change in accounting rules. Mr. Hillman is lying again.
Details/questions:
1. It looks like they did not bother to list net interest expense as a separate item to arrive at income before extraordinary items of (221,000). From this figure we can infer that interest expense was around 9.8 million. Was this number manipulated to achieve results close to break even? Is any accrued interest on the retired debt included in the Extraordinary gain (loss) on extinguishment of debt (21,414,000)? [How about this for a sani flush?]:
My guess is that the 21 million included some accrued interest on the retired debt and this was lumped together with the amount over book value that was paid when retiring the debt. Very stupid/naive trick that an efficient market will catch? Most importantly IMO this nice number (?) [ Well almost break even operating income] was also the result of an accounting change in revenue recognition taking analysts by surprise [they are now recognizing interest income on memberships as operating revenues!]
Other questions:
1. Dues collected for the quarter actually went down versus year ago. Why? apparently lot's of people that have been screwed are not paying their memberships. Are adequate reserves (looses) being taken to account for this non-collectible accounts?
2. What portion of initial membership fees are taken as accrued revenue for the quarter, and what is the basis/rationale for revenue recognition?
3. What portion of initial membership fees are taken as accrued revenue for the quarter, and what is the basis/rationale for revenue recognition?
4. Why not show an unaudited CF statement?
5. Any comment on membership revenues in January? Mr Hillman why do you only comment selectively: "Sales of BFIT-branded nutritional supplements are growing rapidly, with sales of almost $1 million during January 1998" . Have total members gone up, have "same Gym" members gone up?
6. What will happen to new sources of revenues once the January "rush hour" traffic is gone and only the "shallow pocket regulars" remain? Still no shops in MA clubs, why?, this is Jan 98!
Operating income, bottom line etc. were much better in Q4 96 than in Q4 97 but since they talk about restatement of 96 numbers. Let's run a comparison of what the numbers would have been otherwise (i.e., the numbers in the release versus SEC fillings previous to the restatement)
Let's compare the SEC old numbers to the numbers from the release: The "new accounting" resulted in higher reported revenues for 96:
new (revised number from latest press release): 639 million
old (3/97 10K): 625 million.
This is a significant 25%+ increase due to the accounting change! In their favor of course!
The net result of the accounting change is that 97 revenues are also inflated vis-avis the previous rules followed. The key reason for the increase is the recognition of interest income on the financed memberships as part of operating revenues! A highly debatable practice!
The net effect of the accounting changes in the numbers for 96 results in EPS for 96 of:
new (revised in press release): (-1.58/share)
old (filled in 3/97 original 10K): (-2.92/share)
Wow! That was a nice change generated by changes in accounting! Despite the changes which should greatly favor 97 they reported a loss per share of (-2.88/share) in 97! and remember that is for an expanded share base! (i.e., when you are losing money earnings dilution due to higher number of shares outstanding actually helps you!)
The last thing I would like to do here is to see the CF statement which unfortunately is not ready yet. It is a bit more difficult to hide things in the CF statement !
More in the next post.... |
