Do Safeskin and Accounting Questions Go Hand in Glove?
By Herb Greenberg
Senior Columnist
1/21/99 6:30 AM ET
The Thursday thud:
Mystery Theater: When we last left Safeskin (SFSK:Nasdaq), there was chatter in the investment community about whether the company had stuffed the rubber glove distribution channel during the third quarter. Now there's talk about whether the company has appropriately accounted for the closing of a plant in Malaysia. The issue was stirred last week when Safeskin said it was taking a $16 million charge, nearly half of which was to cover the shutdown of the Malaysian plant.
Just one sticking point: Back in the fourth quarter of 1996, Safeskin took a $3 million charge to shut the very same Malaysian operation. Then, after the charge showed up on its income statement, the company said increased demand for its rubber gloves forced it to delay the planned closing.
That leads to the obvious question: What happened to that $3 million charge?
Nothing.
Rather than reverse it, which would've been the conservative way to go, Safeskin left the charge on its books as a noncash reserve. "In essence, what you do with any charge is that you set up a reserve account, and as you close down the plant and take actual charges, you charge those costs against the reserve account," says CFO David Morash. What's more, he adds, the original charge was taken in ringgits, which have dropped sharply in value. So the original $3 million charge is now more like $1.5 million.
Try telling that to short-sellers. They say that by not reversing the charge, the company was able to write down the value of its assets, which lowered its depreciation, which in turn helped Safeskin's income. Investors have been impressed with Safeskin's sharply higher gross margins in recent quarters. (The charge didn't hurt.)
To which Morash replies: "We never stopped depreciating any machinery and equipment because we never stopped using it. So, from an accounting standpoint, you can't stop depreciating equipment that is being used. So, that $1.5 million just sat there as a reserve. It was taken through the income statement but did not in any way effect margins on an ongoing basis ... the SEC wouldn't have permitted us to stop depreciating it."
To which one short-seller says, "If you took the charge you wrote the asset down," which in effect lowered depreciation. "It's simple, basic accounting. There's no way around it."
Either way, they both can't be right. Any accounting experts in the house?
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