In an effort to assuage the pocketbooks of nervous travelers, five U.S. airlines announced they will soften travel restrictions and remove some fees in the case of a Code Red terrorist alert or war with Iraq.
Travelers won't receive a refund if they cancel a reservation, but American Airlines'
In today's Motley Fool Take:
- Bristol-Myers Restates Results
- Quote of Note
- GE Fits Buffett's Bill
- Discussion Board of the Day: Reality Television
- Turn Spending Into Tuition
- Shameless Plug: A Backpack of Tips and Tricks
- Quick Takes: Capital One Financial, Berkshire Hathaway, Qualcomm, more
- And Finally...
The Securities and Exchange Commission's investigation into the company centered on its accounting practices and punched-up sales numbers over the last several years. At issue is revenue generated through wholesale sales incentives at a time when Bristol-Myers was struggling to meet sales and earnings targets. The faulty revenue recognition added $2.5 billion to its top line for 1999, 2000, and 2001, and resulted in large inventory buildups.
The company also restated earnings for the three years in question, revising them down by $900 million. The restatement helped fiscal 2002's first six months, though, adding sales of $653 million and earnings of $200 million.
For 2002, then, it earned $1.86 billion, or $0.96 a share, excluding items. That's down from $1.09 a share ($2.15 billion) on the same basis from 2001. Including items for both years, it netted $4.94 billion in 2001 and $1.89 billion in 2001. Sales for 2002 reached $18.1 billion, marginally ahead of the year before.
Bristol-Myers may have done its best to clear up accounting questions, but outstanding issues still surround the company -- namely its upcoming patent expirations. Sales have been hurt over the last few years as patents have expired on crucial drugs such as BuSpar, Taxol, and Glucophage. A new batch of depression, diabetes, and cancer drugs will face U.S. or European patent expiration over the next few years, bringing new competition and potentially hurting sales and earnings again.
With shares off more than 50% over the past year, investors willing to bet on Bristol-Myers can earn a nearly 5% dividend yield. However, the risks facing the company are significant and should be carefully considered.
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." -- Warren Buffett, age 21, lecture at Columbia University
The juxtaposition, though completely circumstantial, is delicious. A day after Warren Buffett released his annual letter to Berkshire Hathaway
Buffett, a long-term finger-wagger at the pitiful state of corporate ethics and conduct, had this suggestion for investors: "Beware of companies displaying weak accounting. If a company['s] ... pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely that they are following a similar path behind the scenes."
While we wouldn't call GE a "severe accounting abuser," its labyrinthine business leaves plenty of room for earnings management, something the company has done unabashedly in the past. This past year, GE CEO Jeffrey Immelt intimated that those demanding increased disclosure of operations should be careful what they wish for, as the company could provide mountains of information.
That didn't happen, fortunately. But GE did seem to conform to the letter of the accounting law, and not the spirit, by burying in a footnote that its pension fund lost more than $5 billion in 2002, even though it reported more than $800 million from pension fund gains. Under pension accounting treatment, companies are supposed to report actuarial returns, not actual ones. Dollars above the fully funded pension amount can be counted toward ordinary earnings. GE's expected returns were estimated to be 8.5%, so the fact that the fund actually lost more than 11% didn't matter.
(And people say stock options accounting would "distort" GAAP earnings. Pffffft.)
This multibillion-dollar actual loss equals 30% of GE's reported earnings for the year. Moreover, the company will have to adjust all of its actuarial tables to recalculate for the loss in principal. GE's 500,000 pensioners need not worry about their retirement; the company reports that it's still overfunded.
Yes, but overfunded how? Companies are allowed to set their own expected returns for pension assets. GE recently dropped its expected return from 9.5% to 8.5% per year. Now, 8.5% returns may not seem like a lot, but remember, it's not like these funds can just roll the dice in the stock market -- they are widely diversified among stocks, bonds, and government paper.
GE's useful investment avenues are minimized by the fact that doubling a $100 million investment means next to nothing; 8.5% is a fairly high hurdle, and 9.5% is nuts. In the past, Buffett has suggested that a 6.5% maximum return is safest. But companies have incentive to maintain higher expected rates because the "overfund" can be counted as earnings. In such an environment, "safety" becomes tertiary. Change the percent just a little bit, and the overfunded portion rises dramatically. It's the law of compounding turned sinister.
GE handled this disclosure properly. But did they handle it well? Certainly not. It's nowhere in the annual report's "Management's Discussion and Analysis" section. Yes, GE is extraordinarily complicated, but a $5 billion loss of capital seems to warrant at least a mention, doesn't it?
Starting this year, the SEC has asked companies to provide improved disclosure of actual pension performance after a 2002 study of more than 500 annual reports showed a general deficiency and a poor reflection of financial reality. GE's discussion of its pension returns falls far below this goal.
Buffett's remarks may have been targeting much less reputable companies, but he appears to have hit General Electric right between the eyes.
Has Tony Soprano overestimated his worth? Would you watch The Family over The Sopranos? Do you think television has hit a new low when contestants are married by America? How many more seasons do you give Survivor? All this and more -- in the Reality Television discussion board. Only on Fool.com.
How many times have you eaten a Big Mac and thought, "I wish I could justify consuming these 34 grams of fat by knowing I was simultaneously contributing to my kid's college fund"?
We haven't, either. But now you can indulge in such rationalization by signing up for a college-savings rewards program, such as Upromise, EdExpress, or BabyMint. Purchases from all kinds of retailers and service providers -- such as Borders, Starbucks, America Online, Century 21, General Motors, and Verizon Wireless -- can result in up to 25% of the purchase price being rebated in a 529 plan.
Generally, you can reap these rewards in the following ways:
- Register your credit card, and your purchases will be monitored for patronage of participating companies. (Yes, this raises privacy issues, which you'll have to research and reconcile before signing up.)
- Sign up for a special credit card issued by an affiliate, and you can rack up college savings as you would airline miles.
- Use the special discount card issued by grocery stores and drugstores, such as CVS.
- Visit the program's website and shop partner retailers.
- Use special coupons at bricks-and-mortar stores.
- Use partners' services, such as long-distance phone service or Internet connectivity.
Your relatives can also enroll for the benefit of you or your kids. And even if you don't have kids yet but plan to, you can set up an account for yourself and transfer the assets after you've reproduced.
If you're interested, you'll have to do some research. Not each program offers all of the above-mentioned rebate avenues, and each program has a different way of getting the money back to you. Basically, the money ends up in a college savings account, such as a 529 savings plan or a Coverdell Education Savings Account, but your choice of account differs among the programs.
To learn more -- including which thousands of restaurants and retailers participate -- visit Upromise.com, BabyMint.com, and EdExpress.com. Used conscientiously, these programs can be great opportunities to turn day-to-day spending into free tuition.
To learn about Coverdell ESAs, 529 savings plans, and other ways to put Junior through Yale, visit our College Savings Center.
Have you thought about how you'll finance Junior's years in academia? Well, you're in luck. The Motley Fool's Guide to Paying for School is now on newsstands everywhere. Whether you are looking at a private elementary or secondary school, an undergraduate degree, or graduate school, our new guide shows you how much you need to save, explains the best ways to do it, and offers a backpack full of other tips and tricks.
The U.S. government is soliciting bids for help in rebuilding a postwar Iraq, according to The Wall Street Journal. Among those vying for the $900 million contract are Halliburton
Capital One Financial
Wireless communications firm Qualcomm
In local news, rancher Floyd Bevens predicted a 15% rise in the number of chips in the south pasture this year. "We got 15% more head of cattle, so it only makes sense," Bevens said.
Today on Fool.com:
- For updated stories throughout the day, bookmark our ever-changing News section.
- 3 Key Investment Criteria: Matt Richey says good businesses + good people + good prices = successful investments.
- Bob Bobala looks at the major players in the bottled water industry, the outlook for investors and consumers, and even the results of his taste test.
- Selena Maranjian says don't let impatience or impulsiveness hurt your investments.
- Employment numbers and retail sales remain weak -- like, duh.
- Soprano Boss Threatens HBO: TV stars continue to demand more buck for their bang.
- In Fool's School, a treasure of money-saving banking tips.
Bob Bobala, Robert Brokamp, Mathew Emmert, Jeff Fischer, Tom Jacobs, LouAnn Lofton, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Matt Richey, Jackie Ross, Reggie Santiago, Dayana Yochim