The Company's Biz. Sunbeam is a leading marketer of durable household consumer products such as blenders, electric blankets, coffee makers, gas and charcoal grills, and health-related products such as water filters and air cleaners. Its major brands include Sunbeam, Oster, Coleman, Mr. Coffee, First Alert, and Grillmaster.

The $2.5 billion March acquisitions of Signature Brands, First Alert, and a majority stake in Coleman (NYSE: CLN) more than doubled the company's size, with aggregate FY97 revenues of $2.8 billion. However, Sunbeam plans to sell off three Coleman businesses (including backpack division East Pak) for perhaps $250 to $350 million. It is also expected to take a $390 million restructuring charge, including $150 million in cash costs. The integration will involve closing some inefficient Mexican facilities and consolidating 47 warehouses into 14 and 23 factories into 15.

The Story. When it rains, it pours. Sunbeam has been deluged with bad news as investors who were once gaga over turnaround "eggspurt" Al Dunlap now have egg on their faces.

The story began in mid-1996 when the underperforming Sunbeam was bid up from $13 a share on promises by new CEO "Chainsaw" Al Dunlap, formerly head of Scott Paper, that he could produce debt-free profitability in short order. Through layoffs, asset sales, and outsourcing, Dunlap trimmed Sunbeam's 12,000 headcount in half and dispensed with two-thirds of the firm's hodgepodge of 114 factories, warehouses, and offices. FY97 revenues rose 19% to $1.2 billion while profits shot up to $109.4 million, or $1.41 per share, highlighting what looked like a radiant new Sunbeam. When Morgan Stanley couldn't find a buyer for the revamped enterprise, Dunlap simply signed on for three more years and added three more companies for restructuring. That announcement rocketed the stock to the March '98 high of $53.

Then the rain began. A first quarter profit warning followed the very next week. That was followed by an actual first quarter loss (versus a profit of $0.30 per share in the year-ago period) as sales fell 9% during the period. Dunlap blamed tightened inventory management by Sunbeam's major retail customers, some dumb low-margin deals by a top manager that Dunlap then canned, El Nino's supposed effect on grill sales, and delays in shipping its new water filtering product. Acquisition costs were also higher than previously announced.

With a revolving door on Sunbeam's supposed managerial dream team, Dunlap's excuses didn't go over well at a May 11 investor conference. Indeed, Dunlap got into a shouting match with skeptical Paine Webber analyst Andrew Shore. The situation rapidly deteriorated from there as investors took a hard look at the company's 10-K and found that Sunbeam had apparently pumped up FY97 sales by engaging in a "bill and hold" policy whereby the company booked revenues on products long before they were to be shipped to the customer.

The Dunlap really hit the fan, though, after Barron's devastating June 8 critique of the accounting tricks Sunbeam allegedly used to pump up FY97 results. In addition to supposed inventory stuffing, which had boosted reported sales, Barron's argued that Sunbeam had thrown everything but Mr. Coffee into the massive restructuring charges taken in 1996, including completely writing down inventory that it later got more than 50 cents on the dollar for. The article charged that lots of FY97 expenses were also crammed into FY96, which was already a wash. Such gimmicks may have accounted for $120 million of Sunbeam's $109 million in FY97 profits. In other words, the turnaround was bogus. A week later, Dunlap got the axe. And by late June, the SEC had opened an informal inquiry into Sunbeam's accounting.

How Could You Have Seen This Coming? Wall Street's analysts were so in love with Dunlap's cost-cutting that an investor should have simply ignored their bullishness and concentrated on the known facts. One, household durables are a competitive business showing little secular growth. While restructuring an inefficient operation might improve profits, it didn't solve the growth question. Could new water and air filters really do the trick?

Second, companies routinely use huge restructuring charges to pump up future profits through an assortment of tricks. For example, writing down assets today can make the future return on assets look better and, as in this case, actually provide free money when the firm is able to get some cash for those assets. The cash flow statement, though, usually tells the real story. While Sunbeam reported earnings from continuing operations of $123.1 million for FY97, net cash flow from operations was negative $8.2 million. If you ran the numbers, the 10-K made it clear that Sunbeam's return on invested capital (ROIC) was right at its cost of capital. Despite the reported earnings, the company just wasn't creating any value for shareowners.

The Future. Arthur Andersen, Sunbeam's auditors, recently decided that it wouldn't allow its unqualified endorsement of the firm's 1997 financial statement to be used to support Sunbeam's $2 billion bond offering. Deloitte & Touche has been brought in to help review the filings, even as the SEC conducts its own inquiry. With Sunbeam negotiating with bankers to avoid defaulting on loans, this was bad news. Moreover, it means investors don't really know what kind of financial shape the company is in.

Michael Price, president of the Franklin Mutual Series Fund, with a 17% stake in Sunbeam, will exert considerable influence over the new Sunbeam through his board representative and new company Chair Peter Langerman. But the company is now in the hands of CEO Jerry Levin, the former CEO of Coleman and of Revlon. Both of those firms were controlled by financier Ronald Perelman, who owns a 14% stake in Sunbeam. Perelman has a knack for making money even if other investors in his projects don't. Indeed, many believe he's responsible for all but destroying comic book king Marvel Entertainment (NYSE: MRV).

So while some of the organizational changes and synergies discussed by Dunlap show promise for the new Sunbeam, the autopsy on the old new Sunbeam must be finished before it's possible to guess what the future really holds.

-Louis Corrigan (TMFSeymor)

Other Fool Links of Interest:

• The Lunchtime News 06/15/98: Al Dunlap Ousted
• Daily Trouble, 05/18/98: Sunbeam Corp. (NYSE: SOC)
• Sunbeam Message Board