DYII Doubtful Accounts Send Distress Signals By Herb Greenberg
Senior Columnist
01/16/2002 02:46 PM EST
When it comes to red flags, so many are flying over Dynacq International (DYII:Nasdaq - news - commentary - research - analysis) that it's hard to count. Dynacq owns and manages an acute care hospital in Pasadena, Texas, where it manages three physician practices. It also operates two outpatient surgical facilities and a medical office complex.
The only analyst covering the company, Gary Weber of Taglich Brothers, rates it a buy. That Dynacq pays Taglich for that coverage is reason enough to warrant caution: The disclosure is right there in the fine print of the analyst's report.
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But in recent quarters there have been numerous other issues that, by themselves, would warrant a mention here. For example, Dynacq's allowance for doubtful accounts -- something every CFO should know like the back of his or her hand -- has been hovering around the 1% range, which is far below the level used by such rivals as HCA (HCA:NYSE - news - commentary - research - analysis), Tenet (THC:NYSE - news - commentary - research - analysis) and Universal (UHS:NYSE - news - commentary - research - analysis). Yet when asked about the amount of the allowance on the company's bizarre conference call Tuesday, CFO Philip Chan couldn't answer the question.
The dialogue is worth the price of admission.
Caller: Could you give us where allowance for doubtful accounts stands right now, please?
CFO: Are you asking the provision for uncollectable accounts of $41,673 on the income statement? Or are you talking about...
Caller: I'm talking about the reserve -- the allowance for doubtful accounts that would be against your gross receivables so that you have -- you report net accounts receivable. What is your allowance for doubtful accounts? What's your reserve that's been built up over time?
CFO: The way we present our [unintelligible] and net revenue and that is the gross revenue minus, I believe, what you are talking about the reserve for uncollectible portion from insurance company or third party.
Caller: Uh, either one. Let me, maybe if I can contrast it where it was in the 10-K. ... Anyway, it's a standard nomenclature. It's called allowance for doubtful accounts. ... It was $193,000 in August. Do you know what it is now, please?
CFO: Let me turn my page on the same page that you are saying ... a minute.
Caller: All right, let me -- maybe I can go on while he's searching that. If I could ask another question here...
And so it was! The entire call was pretty much like that.
Take the same caller's question about the company's revenue per hospital bed, which appears to be much higher than the average for the acute care hospital industry.
Caller: You have 37 beds and in the hospital you had revenues in here of just under $9 million, and that equates somewhere to about a quarter-million dollars revenue per bed. That is substantially higher than industry averages. Why is that?
CEO Chiu Chan (who, according to the 10-K is not related to the CFO): We are not general acute hospital. We are surgical hospital.
Not an acute care hospital?! The company itself says in its 10-K, filed Nov. 27, that it is engaged in "the ownership and management of an acute care hospital."
The caller continues, saying that revenue at Dynacq's clinic and outpatient surgical center, which had been a key driver of Dynacq's growth, was "down about 7% year over year. At the same time, the hospital revenues just skyrocketed here. They were up 160% or something."
CEO Chan: Well, as you can see, we are aligning our company towards -- we are now saying that Dynacq is a surgical hospital company. We are a surgical hospital company. That is the direction which we are going. So, right now all the focus is, the management focus is a surgical hospital company.
Chan later added: "The reason why we are trying to do this is because we listen to a lot of the research analysts or those brokers about a single focus company enhance our shareholder value a lot better than getting more -- all this kind of other business. ... So, the other thing which is not surgical hospital business is going to go gradually -- scale down."
But last March Dynacq purchased a second ambulatory or outpatient surgery center. Now it's saying that that part of the business will no longer be a focus?!
The conference call continued. A different caller noted that the company had "very impressive" 12% revenue growth in the fourth quarter from the third quarter. "But it appears net income may have declined slightly quarter to quarter. Is that the case?"
CEO: Net income? No. I don't think so. Net income actually go up.
Caller No. 2: I backed out that the fourth quarter net income was about $3,490,000. ... I have this quarter at about $3,378,000. So, maybe a 3% or so decline in net income, and you had 12% sequential revenue growth. I'm just curious where...
The CEO then started talking about how earnings per share of 23 cents were higher than the prior quarter's 22 cents, then the CFO injected:
CFO: Your math ... could be very well correct. The thing that may confuse a little bit during the fourth quarter is where we have the annual audit come in and make all the adjustments. There's no significant adjustment that we made. You may be able to look at the income tax provision for the fourth quarter, which kind of declined pretty significantly from the periods before. That is the time that the auditor come in and look our annual income tax situation.
Caller No. 2: OK ... the real question I'm driving at ... it appears that your profit margins came down quite a bit from quarter to quarter [net profit margin was down nearly 4 percentage points from the fourth quarter to the first quarter] ... and I'm just wondering if you could comment a little bit on why the profit margins ... contracted, and again, is this something we should expect going forward?
CEO: If you look at the number for the whole fiscal year last year, our profit margin is ... 25.3. Therefore our net margin is 24.7 or 24.6. So we are talking about a decimal point percentage difference, and I don't think it's something of anybody's concern.
Year over year, maybe, but quarter to quarter it's nearly 4 percentage points. That's certainly somebody's concern. But I digress, as the call returned to the subject of the allowance for doubtful accounts.
Caller No. 1: I wondered if you'd had a chance to find that answer on the allowance for doubtful accounts on accounts receivable?
CFO: I tried to find out the real question -- all on income statement, the only provision for uncollectible account is -- for this quarter is $41,670 ... before talk about $137,000 -- I don't know what number you have been looking at.
Caller No. 1: $193,000 is what it was in August.
CFO: In August $193,000?
Caller No. 1: August of '01.
CFO: Hold on.
He never did answer the question.
Finally, back to the question of paying a brokerage firm to cover the company, another caller said:
Caller No. 3: I'm showing Gary Weber of Taglich Brothers is the only analyst following the company. On the footer of their report it says his firm was paid by Dynacq to write it. Are there any other nonaffiliated research reports for analyst coverage?
CEO: Taglich Brothers, yes, we paid for them for the analyst report to be written in the beginning. Now, what we are paying them is a quarterly fee to actually have that report available at their Web site. So we don't pay them to write about us anymore, and we do not have any other analysts following this company yet.
Caller No. 3: How much do you pay them?
CFO: $1,250 a month.
Isn't that a conflict? Not according to Bob Taglich of Taglich Brothers. He told me: "They are independent reports. In the micro-cap market, unless you have potential million-dollar fees coming in, it's very difficult for a brokerage firm to cover small firms for research."
Doesn't that mean they're buying an opinion?
"They're not buying an opinion," Taglich says. "We have some stocks that aren't rated." He adds that there is a weeding-out process on companies Taglich agrees to cover, and notes that whether it's hard cash or through investment banking business, companies pay for coverage "one way or the other ... at least we properly disclose it."
He may have a point there. Not that it's the right thing to do -- disclosed or otherwise. |
