The headline for entertainment conglomerate Viacom's (NYSE:VIA) latest earnings press release has a promising start. Full-year revenue is up 8%, and free cash flow climbed 17% to $3 billion. Hey, what could possibly be wrong with that? In a word, nothing.
What's worrisome is the noncash impairment charge of $18 billion. "Noncash" makes it sound benign. It isn't. Somehow, 18 billion real dollars were spent and put on the balance sheet as assets. Press releases were issued, and ink was consumed, in bringing the latest, greatest acquisition to the public's attention.
The acquisitions put "goodwill" -- the classification of an acquisition's total costs that cannot be accounted for with hard assets -- onto the balance sheet. Did you guess the punch line? The money became "impaired." What a word! The assets became less than perfect? Functionally defective? Wow.
Viacom clearly lists the major culprit for the "impairment" as "SFAS No. 142." If you do a Google search on SFAS, scroll past the Sport Fishing Association and an assortment of societies until you hit "Statement of Financial Accounting Standards." Ah, accounting standards. Enacted in 2002, SFAS 142 imposed a mandatory annual impairment test for goodwill. In plain English, that means that if you paid $10 in goodwill, and it's now worth only $6, you have to write off $4 to reflect its current value.
So, let's recap. Viacom's goodwill assets lost $18 billion in value since last year's review. Yikes!
How much is $18 billion to a company Viacom's size? It's equal to 80% of 2004 revenue, 33% of goodwill as reported for the quarter ending September, and 20% of all assets. It's big! Oh, and it's gone.
And how's the outlook? The press release states: "In 2005, the Company expects to deliver mid single-digit growth in revenues and operating income and high single-digit growth in earnings per share." Is that level of growth worth 23 times forward earnings?
Then there's this: "The 2005 guidance does not include the effect of expensing stock options by the third quarter of 2005 in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), 'Share-Based Payment.'" Why is this company paying stock options to people who acquired (or developed) impaired assets? Based on performance, maybe shareholder dilution should stop until overall performance warrants incentive pay.
Viacom spent $18 billion of shareholder money -- and it's now been written off. You'd think such an event would merit a paragraph explaining what has changed to prevent being so optimistic when spending corporate money. Instead, you get this: "(We) are now positioned to fully focus our efforts on the Company's fast growing assets." Why not focus on maximizing the return on all of the company's assets?
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. Click here to see the Motley Fool's disclosure policy.
