"For manufacturers, a majority of [recent] DSO improvement is due to alternative financing," declares John Peak, CFO of Transamerica Distribution Finance, which provides inventory financing, factoring, and other receivables-based financing techniques (although not securitization) to manufacturers.
Lear, which reduced its DSO from 44 days in 2000 to 37 days in 2001, securitized $270 million last year — the first time it has used such a technique. Add that amount back into accounts receivables, and Lear's DSO actually goes back up to 45 days.
"[Securitization] had nothing to do with working capital management, other than that it's a receivables facility. The ABS [asset-based securitization] facility was put in place because it is less expensive to borrow on an ABS than against our revolver," says Wajsgras, who estimates that the lower interest costs saved about $2 million.
"Securitization had a lower average interest rate than our line of credit," adds Sabol, who securitized $23 million for Plexus in 2001 and drew down an additional $17 million in first-quarter 2002.
Of course, companies that opt to securitize usually remain responsible for collecting the receivables, and the technique can be addictive if a company's business doesn't improve, simply because it represents a one-time income gain. "Once you get into the securitization world, it's hard to get out of it," warns Peak. "Once you get on that treadmill and start recording gains on your income statement, it's hard to jump off." That's made all the more likely by the upfront costs of securitizations. They must be amortized, so any event that forces a company to unwind a securitization before its time carries a high price. Finally, there are growing questions about how companies report securitization activity.
But for a company like Lear, highly leveraged after a string of 18 acquisitions since 1994 but with no plans for more, securitization can make a lot of sense. "Securitizations are beneficial to a limited universe of borrowers on a slower growth path with a stable financial position who are not trying to maximize their leverage," says Bob Rubino, senior vice president at Fleet Capital.
And, says REL Americas's Payne, securitization is a legitimate business decision for CFOs looking to reduce DSO and working capital. "There's really no way a company can get DSO much below their payment terms without securitization or heavy discounting," he says. "With discounting, you pay a little to collect cash from the customer; with securitization, you pay a little to collect from a third party." That said, he adds, the better you manage your working capital, the less you may pay for securitization, or even need it.
Indeed, not all companies are turning to securitization. Palm, whose falling stock price has put it under tremendous pressure from investors, successfully reduced its days of working capital from 47 in 1999 to negative 4 last year primarily by focusing on receivables. Palm's credit and collection team collaborates closely with its sales team, says Bruner, and retailers are careful not to jeopardize shipments of the popular Palm handheld devices. "In a slow economy everyone tries to stretch payments," she says, "but I think our products tend to be given a little more favorable treatment."
Palm also focuses on coordinating demand from retailers with its manufacturing, which is outsourced. Once again, this shifts much of the inventory burden to contract manufacturers. But, notes Payne, "there are lots of contract manufacturers making good money." Since companies like Palm are dependent on contractors for their products, he says, there's little likelihood of them unfairly squeezing those manufacturers, whose efficiency may more than compensate for the additional inventory burden. "What is a pain for Palm may be an opportunity for the supplier," he says.
Nonetheless, as you review the following tables of the companies that did the best job of squeezing cash flow out of their working capital, keep in mind that, suppliers aside, some of them may have had a little help from their friends at the bank.
Tim Reason is a staff writer at CFO.
Where the Money Comes From
Asset-based securitization (ABS) allows companies to lower working capital without pressuring customers, but the way companies record it is increasingly under scrutiny. Unlike factoring, which involves a complete transfer of risk (and carries a higher premium as a result), companies that securitize their receivables typically remain on the hook for their collection.
"The ABS was a low-cost alternative to traditional financing," says Lear Corp. CFO David C. Wajsgras. Yet Lear records its "proceeds from sales of receivables" under the "cash flow from operations" section of its cash-flow statement.
Plexus, by contrast, recorded its $23 million securitization under "cash flow from financing." Plexus CFO and COO Tom Sabol says the way companies report securitization varies widely. "Some people view that as part of operations because it relates to receivables, but it is really a borrowing facility. That is how we view it. We believe it is an off-balance-sheet borrowing facility."
The Securities and Exchange Commission has said it would like to see the Financial Accounting Standards Board develop stricter rules for use of the cash-flow statement, a request that will no doubt receive added attention in light of WorldCom's restatement. —T.R.
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