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Tyco Fails to Calm Circling Critics

Thursday's highly anticipated 10-Q filing lacks the balance-sheet data investors were looking for.
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In a much-anticipated financial filing released Thursday,



failed to offer any data to counter the accounting-related criticisms that have helped to shear more than 50% off the company's stock price this year.

As a result, Tyco may remain dogged by suspicions that it has given an artificial boost to earnings by habitually marking down the value of certain assets in companies it acquires. Spokesman Brad McGee responds: "We published information we believe investors wanted to see." McGee adds that "we still maintain our disclosure is second to none."

Without a clear-cut victory over its detractors, the Bermuda-based conglomerate could continue to face skepticism about its accounting and downward pressure on its stock price. Tyco cut its earnings outlook this week and recently announced its intention to draw down $5.9 billion of credit lines to avoid short-term funding problems.

The stock slid $2.15, or 7.44%, to $26.75 Thursday. It's 56% below its 52-week high.

High Hopes

After the close Thursday, Tyco released its 10-Q filing of financials for the first quarter of its 2002 fiscal year, ended Dec. 30, 2001. The company would've sent bears scurrying if it had provided balance sheets for large recently acquired companies that showed it hadn't made aggressive writedowns in their tangible assets. But Tyco provided no such company-specific data for firms that the critics wanted information on, like Sensormatic, an electronic security concern that Tyco bought in November for more than $2 billion.

The bear argument goes like this: If assets like inventory and receivables at an acquired company are marked down before they enter the acquirer's books, the acquirer's cash flows and income statement can get a false fillip. The term used in the market is "spring-loading."

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For example, inventory marked down to below market price can produce fat profits when sold at market price. One way for a company to prove it doesn't do unnecessary writedowns would be to produce balance sheets for the day on which the acquired firm entered its books.

Those numbers could then be compared with prior disclosure to see if there had been big unexplained changes. If there hadn't been, the acquirer would be able to shrug off accusations of spring-loading.

Stub Snub?

There had been high hopes among Tyco's supporters that it would come up with these so-called stub-period financials for certain recent acquisitions. The fact that it didn't do so in the 10-Q will ensure a continuation of this fierce bull-bear debate.

The 10-Q did show that


acquired receivables at Tyco were a mere $22 million at the end of the quarter. Sensormatic's receivables were $212 million in its own most recent filing. How can acquired receivables be only $22 million when they contain Sensormatic's receivables? Could it be that that company's receivables were marked way down to spring-load Tyco's earnings?

Not so, says McGee. He stresses that the $22 million is a net number and includes a substantial writedown of receivables at CIT, an industrial lender Tyco bought last year. That writedown came after CIT was included in Tyco's books. McGee didn't immediately supply the separate numbers for Sensormatic's end-2001 receivables and the size of the CIT writedown. If he does, this column will make sure it passes them along.

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In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.