The Securities and Exchange Commission is demanding that Tyco restate its financial results going back five years. The reason? To account for charges the commission claims Tyco’s former management team covered up.
The restatement is mainly expected to affect $696 million of pretax charges (or $527 million in after-tax charges) taken in the quarters ending December 2001 and March 2003. The change will actually boost Tyco’s results for fiscal 2002 and 2003, but will reduce the conglomerate’s earnings for fiscal 1998 through 2001.
Tyco management stressed that the restatement would not have an adverse effect on the company’s balance sheet, operating results, or cash flow for the rest of 2003 or in the future. The company’s management doesn’t expect the restatement to interfere with debt repayments, either.
Indeed, Standard and Poor’s affirmed its BBB-minus credit rating and stable outlook on Tyco following the announcement about the restatement. Tyco had approximately $25.4 billion in total debt as of March 31, 2003.
Although executives at Tyco played down the negative effects of the restatement, the company’ can’t afford much more bad press. News of a restatement—modest or otherwise—isn’t generally good news for shareholders.
Litigants, on the other hand…well, that’s another matter entirely. “The restatements may strengthen the plaintiffs’ position with regard to shareholder lawsuits,” said S&P credit analyst Joel Levington. “Potential awards, if any, as well as the timing, method of payment, and Tyco’s access to the capital markets are uncertain.”
Tyco management indicated the company was in talks with the SEC over whether to push back other charges the conglomerate took in the quarter ended March 31, including $630 million related to its ADT security-alarm unit.
The market didn’t seem overly concerned with the news, however. Tyco’s share price rose 18 cents to $19.75 early Tuesday afternoon on the New York Stock Exchange. The company’s stock price is up 23 percent, from $16.05, since former CEO Dennis Kozlowski stepped down in June 2002.
IRS Scrutiny Impeding Business, say Tax Execs
Changes in regulations that rein in tax shelters has led to a substantial increase in the number of tax-return disclosures—and a substantial increase in corporate concern about heightened Internal Revenue Service scrutiny. This according to a new survey of 187 senior tax executives conducted by Deloitte & Touche.
As part of ongoing efforts to address tax avoidance, the Treasury Department and the IRS imposed amended disclosure and list-maintenance regulations—under IRC section 6011—that impose more-stringent disclosure requirements on tax returns.
Generally those new requirements govern a specific set of transactions that lend themselves to abusive tax treatment. Those include listed transactions, confidential transactions, and those with a significant book-tax difference, among others.
Although these regulations have been amended several times, the most recent changes went into effect in January.
“The additional enforcement actions by the IRS and the Treasury Department have had a real and dramatic impact, with firms making more disclosures and becoming more risk-averse,” said Clint Stretch, director of tax policy at Deloitte & Touche. “The survey findings raise the question whether the new proposals would unnecessarily place additional burdens on all firms in an attempt to address behavior, by a relatively few firms, that already appears to be waning.”
Among Deloitte’s findings: while only 10 percent of executives said their companies made Section 6011 disclosures in tax year 2000, fully 44 percent expected to make such disclosures in the upcoming tax year. Almost three-quarters believed the IRS would be either very or extremely likely to examine an item if a Section 6011 disclosure were made.
About forty-four percent of tax executives in the survey believed that the Senate’s proposed codification and expansion of the economic substance requirement was at least somewhat likely to delay or impede legitimate business projects at their companies (the economic substance requirement is intended to curb tax benefits arising from transactions with no real business purpose). About four-fifths of the respondents believed the IRS would be very or extremely likely to use the economic substance requirement as leverage to challenge taxpayer positions.
Respondents were not real sanguine about the CEO signature proposal now being bandied about by the Senate. That proposal would require a company’s CEO—not CFO or chief tax officer—to sign the business’s federal tax return. But 96 percent of tax directors said their CEO was not very knowledgeable about the issues reflected in the corporate return. Most executives were concerned that if passed, the CEO signature requirement, the economic substance requirement, and the various proposals to strengthen the current disclosure regime would create significant additional burden on their companies.
Three-quarters of tax executives indicated they would have to increase their budgets to comply with these proposals. More than a third said a budget increase of 10 percent or more would be needed to comply.
White Suit at Abercrombie & Fitch
A federal lawsuit has been filed against clothing retailer Abercrombie & Fitch for allegedly hiring a disproportionately white sales force. The suit also claims the retailer puts minorities in low-profile positions and projects a virtually all-white image in its catalogs.
The nine Hispanic and Asian plaintiffs maintain that the company has a discriminatory corporate policy that favors white workers when filling sales positions and gives current while sales personnel more-flexible work schedules. When the company does hire minorities, the suit alleges, Abercrombie & Fitch funnels them to stockroom and overnight shifts and reduces their hours.
This isn’t the first time Abercrombie has been accused of racial discrimination. Last spring the company removed T-shirts from stores after Asian-American groups complained about depictions of two slant-eyed men in conical hats and the slogan “Wong Brothers Laundry Service—Two Wongs Can Make It White.”
A spokesman for the company, which targets college students with its upscale casual clothing, declined to provide comments to the Associated Press.
“If you look at the material they put out, they are cultivating an all-white look,” said Thomas Saenz, vice president of litigation at the Mexican American Legal Defense and Educational Fund and one of the attorneys for the plaintiffs. “It is difficult to understand why, given that their target age demographic is even more heavily minority than the rest of the population.”
GE, Unions Agree on Wage Package
General Electric managers and union leaders agreed on a new labor contract. The deal will cost GE $1.7 billion over the next four years in higher salaries and health-care costs, according to Reuters. GE and two of its largest unions covering 16,000 employees signed the tentative contract on Sunday. The contract is expected to be extended to cover 11 more unions, affecting another 8,000 workers.
Under the new contract terms, workers’ salaries are expected to rise 11.6 percent over the next four years. Workers are expected to contribute 18 percent of health-care costs, while the company will pay for the rest, sources familiar with the deal told Reuters.
A GE spokesman declined to provide comment. Details of the talks are expected to be made public once the union members start voting on the proposal. A ratification vote is to be held by June 24.
If the contract is signed, labor watchers say, it could send a positive signal to airlines and carmakers aiming to renew deals with workers later this year.
- Luis Leon was named CFO at Royal Caribbean Cruises. Leon replaces Richard Glasier, who left to become president of riverboat-casino operator Argosy Gaming last July. Leon, who joins the cruise operator from Graphic Packaging International, will report directly to CEO Richard Fain. Leon has two decades of financial and investor-relations experience. Interim CFO Bonnie Biumi will stay on as treasurer of Royal Caribbean.
- Federal Reserve vice chairman Roger Ferguson backed the proposed Basel II banking accord, shooting down critics who claim the plan would exacerbate boom-and-bust credit swings. The accord, which would replace the 1988 Basel I agreement on capital requirements for internationally active banks, is expected to go into effect in 2006.
“In evaluating the procyclicality argument, we should not forget the cyclicality in bank-credit flows that we see in history,” Ferguson said in a statement before the Institute for International Finance in New York. He claimed that Basel II could reduce the swings in credit availability and help manage risk.
“We are beginning to see the payoff from more-formal and rigorous quantitative risk-management techniques for credit decision-making, techniques that have also been central to the development of new instruments for hedging, mitigating and managing credit risk,” said Ferguson.