How to Interpret Writedowns

The process of restructuring or closing operations of a company may transcend many quarters. As a result, in order to differentiate the impact of the restructuring or closings while the company is still conducting its normal operations, the company will segregate its reporting into continuing operations and discontinued operations.

A Look at Inverness Medical Innovations

Many times when a company takes a writedown it does signal a problem and in those circumstances the stock will be met with selling. However, sometimes the writedown is received as a welcome relief and a constructive effort by the company to, as the old song goes, "accentuate the positive and eliminate the negative." Other times, it is just a necessary evil of conducting business or acquiring other companies.

For example, take a look at the following excerpt from Inverness Medical Innovations' (IMA) recent quarterly earning report:

The Company's GAAP [generally accepted accounting practices] results for the third quarter of 2007 include amortization of $19.9 million, the write-off of $169.0 million of in-process research and development acquired in connection with the Biosite acquisition, $0.5 million of restructuring charges, $3.3 million of stock-based compensation expense, and a $6.3 million charge related to the write-up to fair market value of inventory acquired in connection with the Biosite and Cholestech acquisitions. GAAP results for the third quarter of 2006 include amortization of $6.4 million, the write-off of $5.0 million of in-process research and development acquired in connection with the Clondiag acquisition, a $1.2 million restructuring charge, $1.3 million of non-cash stock-based compensation expense and $1.3 million of prepayment penalties and a write-off of debt origination costs upon early extinguishment of related debt. These amounts, net of tax, have been excluded from the adjusted cash basis net income per common share for the respective quarters.

None of these accounting revisions were seen as onerous or out of the ordinary. And the action taken by the company was not seen as a tacit admission of some sort of strategic business failure. As a result, the earnings and revenues from Inverness Medical Innovations were excellent and the stock rose to a new all-time high.

Homework Time

• Observe the reaction to a company's writedown.
• Read a few earnings reports or press releases that contain a writedown and ascertain the writedown type.

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