I've got a big problem with Regulation Fair Disclosure and another, smaller one with eBay (Nasdaq: EBAY).
"What?" cry Fools everywhere. "How can you object to Reg FD? It requires public companies to disclose material information to all investors fully and fairly, rather than whisper in the ears of favored analysts and investment bankers! That's good for the individual investor!"
I don't object to the rule itself. The Motley Fool has been a strong advocate of the rule -- in fact, Tom Gardner recently exhorted Congress and the Securities and Exchange Commission to enforce the rule. I agree wholeheartedly with this position.
My problem with Reg FD is that it has produced an unprecedented level of whining in Washington -- and that's no small feat. It's inescapable. Companies are whining. The Securities Industry Association is whining. The folks at the "think-tank" (read: pseudo-academic corporate stooge) American Enterprise Institute are whining. The Wall Street Journal is piping in Wall Street's whining like the FBI blaring Madonna into a besieged Amish compound. I'm cracking under the 24-hour din. Please make it stop! I'll do anything!
There's a chill o'er the land
Detractors commonly cloak their displeasure that the old system of privilege and favoritism is collapsing in the mantle of public service. They say that Reg FD has created a "chill" between companies and investors. In a recent article (subscription required), the Journal presented the following evidence: "Guitar Center Inc. (Nasdaq: GTRC), for instance, says it is less forthcoming these days about business trends it foresees, while Sierra Health Services Inc. (NYSE: SIE) 'now is much stricter in sticking to what we've already said publicly' when meeting with analysts, says a company spokesman."
Wow, that's a scary picture, isn't it? What if we never again hear about trends in the guitar business from management outside of the conference call? How can we possibly analyze this complex, mature industry without constant and attentive guidance? Are you getting chills up your spine, too?
Of course, companies can talk just as much as they could before, they just can't do it behind closed doors. What is so 'chilling' about that? As Warren Buffett said regarding Reg FD recently in a press conference (audio file, at 21:00), "I don't see how anything could be more obvious than the fact that you ought to talk to all your shareholders at the same time, if you're going to talk about anything important.... It is not hard to treat people fairly." Besides, he went on to say, the way expectations are set is silly. Jeff Fischer derided the practice last week in regards to eBay.
eBay can't talk, either
Speaking of eBay, I ran into Reg FD when I talked with some representatives of the company recently. I wrote an article last month called eBay's Cash Isn't Flowing, where I complained that rising accounts receivable and "other current assets," combined with falling accounts payable, would hurt eBay's cash flow for the quarter.
The metonymic company called me soon afterward to set the record straight. It said that most of the jump in "other current assets" came from a $16 million restricted cash balance obtained from the acquisition of Internet Auction Co. Beyond that, it couldn't discuss the contents of "other current assets," since that would be a violation of Reg FD. It said, however, that I was irresponsible to discuss the matter without knowing the details.
Fair enough on both counts. Fairer still is that eBay listed the restricted cash in a separate line item in its recently released 10-Q. Kudos to the finance team. It would have been nice if it had listed it in the press release, too, but that's water under the bridge. Now it would be nice if it would describe the $60 million in "other current assets" still on its balance sheet somewhere in its 10-Q, so that investors like myself wouldn't have to guess at them.
So how is cash flow, anyway?
The 10-Q for the first quarter is out now, so we can look at the cash flow statement itself for the answer. Operating cash flow (OCF) came in at $37.4 million, 338% above last year's first-quarter total. Good news, yes?
Not exactly. Excluding the tax benefit from employee stock options -- which has little to do with operations -- the total falls to $24 million. That compares to a similarly adjusted $4 million in OCF a year ago.
That's not bad, but it doesn't match up very well to the change in pro forma operating income. Adjusted for non-cash items, operating income rose to $35 million in Q1 2001 from a $4.4 million operating loss in Q1 2000. So what happened to all that operating income when it came to operating cash flow? Because of lagging working capital management, eBay left $26.7 million more unconverted to cash on its balance sheet this year than it did a year ago. It's normal for that number to rise as sales increase, but, as we see, it's behind the increase in operating cash flow by some $11 million. As a result, its Foolish Flow Ratio increased to 1.19 from 0.90, discounting the restricted cash.
Now, I'm not even close to wanting to sell my shares because of this. I'm willing to accept that these things happen in some quarters, especially when the company has just made an acquisition. Still, this is the continuation of a five-quarter trend of rising Flow Ratios. I know that the company can do better. Despite my misinterpretation of $16 million worth of "other current assets," I stand by my contention that eBay can do better than this in the cash flow department.
What's more, I still want to know about the other $59 million in "other current assets." C'mon, eBay, overcome the chill that has supposedly fallen between companies and investors because of Reg FD. You don't have to whisper the answer in analysts' or reporters' ears -- just tell us all in your 10-Q.
As for Guitar Center's reticence to talk, I could not care less.
Brian Lund is an eBay shareholder who always wanted to learn to play the guitar, but just never got around to it. Fortunately, his sweetie plays and sings like an angel. To view his portfolio, check out his profile. The Motley Fool is investors writing for investors.
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