Wall Street has been curious about SFBC's ( SFCC) books for some time. In November's third-quarter earnings conference call, Jefferies analyst David Windley wanted answers on SFBC's days' sales outstanding, or DSOs. Investors track DSOs, a measure of how fast a company collects on its accounts receivable, to check on sales trends. A high number can mean underlying sales are weak. Windley had just heard SFBC say the number had dropped by nearly half from one year earlier. But with the company's receivables on the rise, that figure seemed to make no sense. "Can you walk me through the calculation?" Windley asked. "I don't see how you get to 50 days on that." CFO David Natan said the company had subtracted advance payments from its accounts receivable total when reaching the DSO number. Moreover, he indicated, those advances had enabled the company to report positive cash flow for the period. Short-sellers have since pounced on those comments. "Either its billed DSOs are higher than Natan explains, and that begs a question about collectability," one says. "Or its A/R is overstated with respect to working capital -- which investors, debtholders in particular, look to as a measure of financial stability. ... Something doesn't add up." The news comes as new management
struggles to revive the hard-hit stock in the wake of a Bloomberg expose of the company's practices in its key clinical trial business. SFBC is due to post fourth-quarter earnings after the bell Thursday. The company's media spokesman and investor relations firm both failed to answer questions for this story.
Tulsa money manager Fredric E. Russell tends to agree. "That doesn't look like cash under
generally accepted accounting principles -- or even under any common sense view," says Russell, who has no position in SFBC's stock. "And it's not smart to play games. Eventually, people will find out." Critics further question why SFBC has so many long-term advances at all. After all, the company's major competitors, such as Covance ( CVD) and Charles River Laboratories ( CRL), carry no such advances on their own balance sheets. Moreover, some say, SFBC's short-term trials should not be generating long-term advances and even its long-term business -- operated by recently acquired PharmaNet -- should not be generating so much. To be fair, PharmaNet already had $15 million worth of long-term advances listed on its books when the company joined forces with SFBC in late 2004. However, that figure has more than doubled after just one year under the SFBC corporate umbrella.