Company spokesman Brian Ek rejects the notion that the company has changed its reporting practices in any way. "We'd like to take credit for improvement," says Ek, but he contends there hasn't been any. "We've always reconciled pro forma results to GAAP," he says.
Maybe. Yet in the first few lines of text of Priceline's Q1 2001 earnings release, the company stated that it had a pro forma loss of 3 cents a share, before restructuring and special charges. Only in the table that followed did the company show what those items were. In the release for Q1 2002, however, the company reported its pro forma and GAAP earnings, both of which happened to be 2 cents, within a few sentences of each other.
Of course, Priceline has less reason to make the comparison between pro forma and GAAP results difficult, now that the Internet bubble has burst and the company has managed to move into the black according to generally accepted accounting principles as well as its own. "They've gotten a lot better now that they see themselves as a niche player in the travel market instead of an E-commerce giant," says Kathman. "And their GAAP earnings are the same as pro forma."
Synthetic Choices
Some companies simply won't budge. Symantec Corp., a maker of Internet security technology, is one of a number of companies that have continued to use synthetic leases to keep real estate financing off their balance sheets, despite the hue and cry that has arisen over such devices in the wake of Enron. The company defends its practices by pointing out that the arrangements meet existing accounting rules. Indeed, the Financial Accounting Standards Board has yet to finalize a proposed change with regard to SPEs, including those involving synthetic leases. The new rule would make it much harder, if not impossible, to make use of such arrangements when they involve SPEs.
Synthetic leases that don't involve SPEs, like Symantec's, wouldn't be affected by that change. But most lenders have to get a regulatory exemption to offer such leases without the use of SPEs, and only a handful have done so. While the debt reflected by Cupertino, California-based Symantec's synthetic leases is indeed kept off the balance sheet, the amounts involved appear on the balance sheet under "restricted cash."
And Symantec CFO Greg Myers sees no need to revisit its use of off-balance-sheet financing in light of Enron. "I don't think you try to alter a solid financial transaction because there's been fraudulent and criminal activity at another company," he says.
But the distinction Myers draws is largely beside the point, notes Krispy Kreme's Casstevens, because after Enron, the legitimacy of off-balance-sheet financing depends less on rules than on public perception. "We don't want to be the judge of that [legitimacy]," says Casstevens. "It depends on what the public thinks."
For that reason, Krispy Kreme has unwound a non-SPE synthetic lease that was slated to finance a new mixing plant in Illinois, and will instead carry some $33 million to $35 million of the debt on its balance sheet. And its confidence-building moves haven't stopped there.
Cisco Systems Inc. has also decided to abandon its use of synthetic leases no matter what comes of FASB's proposal, announcing last March that it would unwind all the leases it has used to finance its San Jose, California, headquarters and several manufacturing facilities in California and New England. In so doing, Cisco will consolidate roughly $1.6 billion in real estate assets by the end of the current fiscal year, adding some fat to its famously lean balance sheet.
Yet in today's climate, Cisco has concluded that it's better to have investors see a bigger balance sheet than suspect that it's hiding debt. "This should remove any concern that investors may have about off-balance-sheet financing," says company spokeswoman Terry Anderson.
In some cases, at least, investors seem so eager for greater transparency that they're willing to ignore the decrease in reported returns on capital that stem from bigger balance sheets. For instance, when Sears, Roebuck and Co. returned $8 billion in credit card receivables from an SPE to its balance sheet, in early 2001, the move was partly to blame for slashing the company's reported return on assets from 3.6 percent in 2000 to 1.6 percent last year. Even so, Sears's stock has soared by almost 70 percent since the change, more than doubling the gains seen by its peers.
Krispy Kreme, for its part, doesn't expect to be penalized for having more debt on its balance sheet, says CFO Casstevens. After all, he notes, the company's plans for a synthetic lease were fully disclosed. And while few investors might once have disregarded its off-balance-sheet treatment and considered the facility Krispy Kreme's, Casstevens says that, post-Enron, that's no longer likely. Today, he says, "more investors understand that nothing has changed" when assets are moved off the balance sheet through such arrangements.
Coming Clean
Indeed, more investors can now be expected to disregard any accounting change that has no bearing on a company's financial condition. Needless to say, IBM's income-statement changes concerning one-time gains have nothing to do with its fundamentals. When all is said and done, IBM's nonfinance debt level remains a relatively insignificant 7 percent of total capital. And the company's cash flow grew a healthy 10 percent last year, even after discounting changes in working capital. So long as any stock repurchases, which IBM typically makes when its share price falls, are funded out of free cash flow and are not large enough to weaken its equity base, credit analysts are likely to approve.
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