Many Numbers Still Don't Add Up at Tyco

The decline in profitability means that Tyco's goodwill must be worth much less than the $26 billion stated on the balance sheet. Yet management and Tyco's auditors, PricewaterhouseCoopers, didn't use the opportunity of the annual report to mark down the goodwill. This may be because the reduction, when it comes, is going to be very large and would put the company in violation of a key debt-to-capitalization provision in its agreement with its bankers.

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Tyco's management will try to build on any positive sentiment arising from this report to get a debt restructuring done with its bank creditors, who are owed $3.9 billion in February. Tyco's Breen must convince the bankers that probes conducted by the Securities and Exchange Commission and the Manhattan district attorney, which are, no doubt, far more rigorous than the Boies report, will not turn up any further indications that Tyco's former profitability was a mirage.

Breen also must show confidence that 2003 earnings and cash flows won't be a disaster. The government probes and 2003 earnings will now become the main focus of investors. On Tyco's conference call, scheduled for Tuesday morning, expect canny investors to demand updated guidance on earnings and cash flows.

Possibly, questioners will focus on moves in the fourth quarter to boost cash flow. It appears the company has been selling receivables, or bills Tyco's customers have yet to pay, for cash. While this practice is widespread and fully legal, it appears that Tyco has been relying significantly on this practice.

On Sept. 30, Tyco sold $350 million of receivables to CIT (CIT Quote), a lender that Tyco disposed of through an IPO in July 2002. However, Tyco's fiscal fourth-quarter earnings release said that it did $53.9 million of receivables sales in the quarter, which was a net number, according to Tyco spokeswoman Elizabeth Mather. That implies that Tyco had a large outflow to offset the cash inflow of $350 million. Did the company buy back a significant amount of receivables? Mather didn't comment on that possibility.