Pssst. Hey, buddy, want an investing tip? Yes? OK, here it is: Never, ever invest in the stock of a company whose financials require a Rosetta stone to decipher. Chances are you'll be relying on what management says. And what management says is very likely to be the sunniest scenario imaginable.
That's what I ran into yesterday while trying to decipher the fourth-quarter earnings announcement for Yellow Pages provider Dex Media (NYSE:DEX). Unsurprisingly, the press release was very bullish, touting massive free cash flow generation and substantial debt paydowns. All of that is true. Dex did generate $930 million in earnings before interest, taxes, depreciation, and amortization -- a measure unromantically known as EBITDA. Free cash flow was over $450 million, and $460 million of debt was paid off.
Here's the problem: The third-quarter filing with the Securities and Exchange Commission shows that $180 million of the company's debt back then was current -- or due within 12 months. That means probably somewhere in the neighborhood of $200 million of the company's $460 million payment went toward obligations coming due, leaving $260 million for longer-term obligations.
Is that really so bad? No, but you need to look at what else Dex Media owes, and will owe. Consider: Interest for the quarter cost $407 million. Capital expenditures were $55 million. Subtract those costs, and debt buybacks, from Dex Media's $930 million EBITDA and you have... $8 million.
And, by the way, the company also had $29 million worth of one-time payments made for advisory services and severance. That means more than $20 million of the company's debt buyback was funded through IPO proceeds left over from last July that won't be available in succeeding quarters. There's also Dex Media's 1.58% dividend, which will probably run $15 million to $20 million per quarter. Suddenly, the firm's free cash flow doesn't seem so large, does it?
It's worth noting that representatives from Dex Media were kind enough to help me walk through the numbers yesterday. They're aware the financial statements are more than a little thick. I'm grateful that the company is Foolish enough to look under the hood and see if there's a way to make it easier for average Janes and Joes to keep up with the business. But that doesn't mean I like the stock. Getting to that point is going to take a whole lot more than a Rosetta stone and some reassurances.
For related Foolishness:
- Don't be fooled by free cash flow illusions.
- Dex Media is still searching for growth.
Fool contributor Tim Beyers wishes his phone book would talk to him like in the Dex Media commercials. But, then again, does anyone actually use the phone book anymore? Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has a disclosure policy.
