Over the years, a number of products and services that inadvertently proved lethal have led to rating revisions for the companies that offered them. But this may be the first time that a killer whale was the culprit, at least in part.
Last February, in a widely publicized incident, a bull orca named Tilikum killed a female trainer at SeaWorld Parks & Entertainment. On Monday, the Occupational Safety and Health Administration fined SeaWorld $70,000 for exposing workers to drowning hazards when taking care of killer whales. On Tuesday, Standard & Poor's revised its outlook for SeaWorld to negative.
S&P attributed the revision not to any reputational harm caused by the death, but rather to the risk that the company's operating performance and debt leverage will continue to deteriorate in the third quarter. That's logical. SeaWorld was acquired by private-equity firm Blackstone last December, and while the $2.7 billion buyout didn't leverage the company too highly, it did add debt as a concern. While the economy continues to stagnate, S&P expects SeaWorld's leverage to rise to 4.9x of EBITDA in 2010, reflecting the company's aggressive capital expenditures on new rides and attractions and weaker cash flow performance.
In a conversation with CFO today, S&P analysts admitted the timing of their revision was a little awkward, but said it was dictated more by the receipt of SeaWorld's second-quarter earnings report. The committee reviewing SeaWorld's rating reached its conclusion before the OSHA fine was announced, they added.
Still, the accident did dent the company's second-quarter performance, according to the S&P analysts. It's hard to sit in the stands and watch a killer whale playfully fetch water rings when you know it has attacked three people. So, for our money, the orca shares some blame.
As for Tilikum, the orca continues to be a reputational and operational risk: SeaWorld intends to put him back into shows at some point.
The Financial Accounting Standards Board has taken the first step in a project that could actually work in favor of financial-statement preparers for a change. Announced over a year ago, FASB's disclosure framework project could help cut back on the redundancies and extra information that companies feel compelled to include as backdrop to their core financial figures.
For now, disclosures based on myriad accounting standards and regulations are like a bunch of mixed chocolates, according to FASB chairman Robert Herz. During the board's first public meeting on the disclosure project, Herz said that for the most part, investors know what they'll get when they look at financial statements. But when they look over the disclosures, they see something "in between the box of chocolates that Forrest Gump talks about, where you kind of know what you're going to get but it's an awful lot of variety."
Partly to blame is FASB itself. Ronald Bossio, FASB's lead staffer on the project, acknowledged that the board hasn't been consistent over the years on its own standards that address disclosures, some of which have been drawn up to be helpful but aren't truly necessary. As a result, some of the existing rules support "the perception or reality that some standards are [promulgated] ad hoc," he said.
To stem the confusion and introduce more consistency, FASB wants to come up with literature that moves companies away from trying to fulfill a compliance checklist and instead has them focus on the kind of additional information that would be most useful to readers of financial statements.
Using another simile, Herz likened the current problem of unnecessary disclosures to "defensive medicine," when doctors do extra procedures to reduce their malpractice risk. Indeed, companies tend to augment their disclosures with extra, immaterial information in an effort to satisfy their auditors and regulators. At the same time, Bossio said, the Securities and Exchange Commission demands that "people should not focus on compliance but on effective communication."
Because of the mixed messages coming from standard-setters and regulators, FASB board member Leslie Seidman predicts that finance executives will take a keen interest in the disclosure framework as it develops. (The next step is a discussion paper expected to be released to the public later this year.) "There's been a trend lately in the corporate community of growing frustration over their belief that the package of financial information they're providing doesn't help them communicate about the business," she said.
Tom Selling, a financial reporting and management consultant, made an intriguing point about General Motors' pending initial public offering on his Accounting Onion blog on Tuesday: How can the government -- which owns 61% of the automaker -- basically review itself and keep both its integrity and personal interest (monetary returns) intact?
Taking a cynical view of the Securities and Exchange Commission's ability to retain its "independent regulator" moniker when it reviews GM's registration statement -- due to hit the regulator's desk any day now -- Selling proposes that the SEC step aside during the process. Among Selling's suggestions: assign an ex-SEC staffer to review the registration statement for a truly unbiased view or employ an outside accountant and attorney to double-check the commission's work.
His reasoning: the reputations of both GM and the SEC are at risk for whatever information the automaker puts out about its current status and how inquisitive the commission's staff gets about that data. "There is just no getting around the fact that the issuer is the government, and that selfsame government will be reviewing what is effectively the sales brochure for the offering for truth in advertising," Selling writes.
But beyond the issue of how good a job the SEC can do in its review lies potential shareholders' gut feelings about GM. Will they trust that a huge company can speed through its travails and still claim financial integrity? We could find out by the end of 2010 when the "largest IPO in history" (in Selling's words) is made, just a little over a year after the automaker emerged from 83 days of bankruptcy protection (albeit with the help of a government bailout). As it is, GM acknowledges that reputational issues have hurt car sales in the recent past, which could likewise affect its initial stock price.
For now, while GM is still under the thumb of the U.S. Treasury Department, its brand is synonymous for some observers with "Government Motors" (a nickname recently rejected by departing CEO Edward Whitacre). That could change if, as has been reported, the government's holdings fall below 50% after the IPO.
While new accounting rules may accelerate revenue recognition for some companies, the resulting "pleasurable sensation" may soon be replaced by a "lingering hangover of financial data reporting hassles," says a new report released by accounting and financial consultancy RoseRyan.
For instance, affected companies must choose between prospective adoption and retrospective adoption of the new rules, notes report author Kelley Wall. Fewer companies will choose retrospective adoption because the requirements are potentially time consuming and tough to comply with, she contends. That's because retrospective adopters, like Apple, are required to produce selling-price estimates for the individual components of "bundled" products going back two years. As a result, only companies that think the financial-statement impact is worth the time and money spent on converting historical data into verifiable price estimates will go this route.
Prospective adopters run into different problems. To start, they will have to use two sets of rules temporarily. They will use the old rule to recognize deferred revenue that exists as of the adoption date, and the new rules to recognize revenue for new contracts. Prospective adopters also must provide both quantitative and qualitative disclosures in the year the rule is adopted, so that financial-statement users get a clear picture of the company's financial health. The company has discretion regarding what to provide in the disclosures, but FASB's Emerging Issues Task Force provides some guidance.
What's more, management, investors, and analysts will likely want some type of trend data from corporate finance departments, so even prospective adopters will have to work up some high-level estimates of what the financial statements would have looked like under retrospective adoption -- which means unearthing prices for bundled components may still be necessary, adds Wall.
The National Federation of Independent Business performed some time-bending on its Website Tuesday morning. The link for the much-anticipated July survey of small-business sentiment pointed readers to the previous month's survey; the current one was missing. So, for a brief hour, it looked like small-business owners were slightly more optimistic about the direction of the U.S. economy, as they had been in the June report. That would have been good news amid the din of reports about credit-starved small businesses.
If only. Instead of the NFIB optimism index having risen 1.6 points as it did in June (continuing a gradual ascent), in July it actually dropped by 3.2 points. Small businesses are as pessimistic as they were at the beginning of the year, and trends in the NFIB survey's components are anything but encouraging.
On a seasonally adjusted basis, for example, only 9% of NFIB members have unfilled job openings, and only a net 1% of firms plan to create new jobs. The number of firms planning capital expenditures is still near a 35-year record low, and small businesses continue to liquidate inventories: 21% more firms reported a depletion of inventory in the last three months than those that reported gains, and 3% more firms plan to cut inventories than add them in the coming three months.
It's easy to blame the banks for all this pessimism, and Federal Reserve chairman Ben Bernanke did so in a speech on Monday. "It seems clear that some creditworthy businesses -- including some whose collateral has lost value but whose cash flows remain strong -- have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating," said Bernanke at a Fed meeting on addressing the financing needs of small businesses.
However, the 800 or so members of the NFIB say access to credit is not their biggest problem. No, the top problem is poor sales, say 30% of firms. It's no wonder: data out today shows that retail sales in the U.S. tumbled half a percent in June after falling more than 1% in May. Consumers bought fewer cars and car parts, and less furniture, sporting goods, books, and music. That spells trouble. With revolving consumer credit (credit cards) falling 10% in the latest Fed statistics, government stimulus programs running out, and time travel still in development mode, the economic horizon for small firms looks dark indeed.
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