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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (70705)	11/19/1999 10:48:00 AM
From: 18acastra	Read Replies (1) \| Respond to of 132070

Aggressive Accounting at Celestica Article Appended. I think CLS is an accident waiting to happen. Article makes one mistake when they talk about payables being stretched. In article it mentions that if payables weren't stretched so much, operating cash flow would have been up less. In fact, by my math, if payables weren't pushed out, Operating Cash flow would have been down another $30mm-$40mm. Here is the article, what do you think???? Whenever Celestica (CLS:NYSE), a Canadian contract manufacturer, releases earnings, it touts something it calls "adjusted net earnings" per share. This is earnings per share before the write-off of goodwill and one-time "integration costs related to acquisitions," which in the case of Celestica is important because the company, a roll-up of contract manufacturers, has been on a takeover binge for the past two years. What's more, adjusted earnings, which aren't prepared according to generally accepted accounting principles, are considerably higher than net earnings. (This year, analysts expected adjusted earnings to be $1.35 per share vs. 76 cents for net earnings.) Just one problem (as if you couldn't see this coming): None of Celestica's U.S. competitors have much in the way of goodwill or integration costs. Goodwill generally represents the cost of an acquisition in excess of book value; most U.S. acquisitions, if outright purchases, by Celestica's competitors have been done at or near book value. Others have been recorded as a pooling of interests, which eliminates goodwill as companies' existing financials are lumped together. And about those pesky integration costs: None of Celestica's U.S. competitors, even those that have done large acquisitions, reports earnings after integration costs. So why does Celestica do it? A spokesman says that under Canadian accounting rules ("because we have a majority shareholder who has multiple voting rights"), the company isn't allowed to do pooling acquisitions. And it breaks out integration costs, he says, because in the past two years the company has ballooned to 28 facilities from two. "We want people to see what costs are associated with growing rapidly." Try telling that to short-sellers, who believe Celestica is trying to make itself look better than it really is. They argue that the goodwill, which is high, is high because Celestica has paid top dollar for many of its acquisitions. And they say that it's misleading to treat integration costs as one-time charges because they have occurred, like clockwork, for the past seven quarters. (The charges amounted to $8.1 million last year and nearly $5.3 million so far this year -- minuscule compared with adjusted earnings, but enough, several critics suggest, to help make reported forecasts. And making forecasts is important for a company that has raised $725 million in two stock offerings since March.) Aren't those expenses any company with a growth-by-acquisition strategy should have to live with? The spokesman says no, because they're specific to each acquisition. And he adds that, "At a point when we're at a size where we report a core business relative to our peers, [those costs] will be reported as part of our general operating expenses." Did I hear him correctly? Treat it one way now and treat it another way later? (Yup, that's what he said not once, but twice. And, by the way, he ranks up there among the helpful "nice guys" of corporate mouthpieces; I really liked him.) One other point: Until this year's third quarter, Celestica's cash flow had been negative. However, with the reporting of $70 million in positive cash flow, the company also reported that its payables -- the bills it owes -- stretched out to 69 days from 61 days the quarter before; the industry standard is 35 to 50 days. If payables had stayed the same, one short-seller says, cash flow wouldn't have gone up anywhere near as much as it did. The spokesman says the company feels "there is more work to do on the balance-sheet side." But he adds that with a company growing as fast as Celestica, there's bound to be some "lumpiness" in the business. That's one way to look at it. The shorts are looking at it another.