Tag Archives: restatement

Kirby to restate results after goodwill impairment error

William Alden

Kirby Corporation is restating its first quarter results following an error it made in its goodwill impairment charge. Instead of a pre-tax charge of $260 million, it should have booked a charge of $388 million. After taxes, the net income loss increased by $99 million.



Kirby is the largest domestic tank barge operator, transporting bulk liquid products. It also provides after-market services and parts for engines, transmissions and gears. Just over half of these parts are sold to oilfield service and E&P companies. The company has its head office just west of downtown Houston.

New goodwill impairment test

The goodwill impairment occurred in its distribution and services segment and was a result of the dramatic decline in its share price during the first quarter. The company was tripped up by revisions the Financial Accounting Standards Board (FASB) made in the process of testing for goodwill impairment. These revisions came into effect at the beginning of 2020 for Kirby.

In certain circumstances when performing a goodwill impairment test a company can get into a circular logic loop. If the fair value of a reporting unit is below the carrying value, triggering an impairment, a deferred tax asset (arising from the book/tax differences in the treatment of goodwill) can increase in value, causing an additional impairment. This causes the deferred tax asset to increase, triggering more impairment. To address this, in the new guidance, FASB mandated the use of a simultaneous equation to solve the problem.

Kirby did not perform the simultaneous equation in its initial accounting for the impairment loss.

Effect of writedown

Prior to the writedown, the company had goodwill of $954 million and intangible assets of $211 million out of total net assets of $3.4 billion. In addition to the writedown on goodwill, it also impaired the value of intangible assets by $165 million.

Kirby stressed that the impairment was a non-cash item and had no impact on EBITDA. While that is technically true, I often find such explanations disingenuous when companies use them.

Stewart & Stevenson

Kirby didn’t specify which acquisition was the primary cause of the impairment. The likely culprit is the acquisition of Stewart & Stevenson in September 2017. Kirby paid $758 million for the business that included $331 million of goodwill and $155 million of intangible assets. It paid for the business with $378 million in cash and the rest in stock.  It sounds like Kirby has written off all the goodwill and intangible assets from that business. Operating margins in the Distribution and Service segment have fallen from 10% in 2017 to 5% in 2019 and 1.5% in the first quarter of 2020.

In other words, Kirby massively overpaid for Stewart & Stevenson. Ultimately, it’s the shareholders who pay for that profligacy.

SEC filing – Kirby to restate goodwill impairment

 

Largest Houston company to restate financials

Crown Castle, now the largest Houston-area public company by market capitalization ($68 billion) following the recent energy meltdown, has announced that it will restate its financial statements for 2016 through 2018. It may have to file an extension for its 2019 results.



The company is based in the Galleria area and owns, operates and leases more than 40,000 cell towers and more than 75,000 route miles of fiber supporting small cells. It has revenues of $5.8 billion and 5,000 employees.

The restatement is the result of an error in its revenue recognition of tower installation services. In short, the company had been recognizing the entirety of the transaction price when it had completed installation services. However some of the transaction price was consideration for  permanent improvements in the installation. The improvements were recorded as fixed assets, therefore the consideration received for that element should have been recognized over the lease term.

The effect is to reduce adjusted EBITDA for 2019 by $100 million. Profits for previous years have also been reduced. The cumulative effect is increase liabilities and reduce equity by $457 million. It sounds like a big number but it is less than 4% of equity.

The Securities and Exchange Commission (SEC) issued a subpoena in September 2019 requesting certain documents from 2015 through to the present. However, the company states it had previously provided information to the SEC related to the matter. The company also said that the SEC investigation is still ongoing. That sounds like there could be more bad news coming.

The auditors for Crown Castle are PricewaterhouseCoopers. This episode doesn’t reflect well on them.

Unsurprisingly, the company that the restatement indicates the existence of one or more material weaknesses in its internal control over financial reporting.

SEC Filing – Crown Castle restatement

Seismic company states that former management misappropriated nearly $17 million

SAExploration Holdings has restated its annual report for 2018 and selected financial data going back to 2014. As a result, at December 31, 2018, stockholders’ equity swung from equity of $15.4 million, as originally reported, to a deficit of $17.4 million!



Furthermore, the company states that former CEO Jeff Hastings and former CFO Brent Whiteley misappropriated $16.6 million between 2012 and 2019. Not surprisingly, the company stated that the Securities and Exchange Commission and the Department of Justice are conducting parallel investigations.

SAEX is a global provider of seismic data and processing services. It has its head office in west Houston. It currently has a market capitalization of $13 million.

At some point in 2019, the SEC started an investigation in relation to revenue recognition, accounts receivable and tax credits. In August 2019, the Board established a special committee of independent directors to oversee an external investigation with respect to the matter.

Vendor and customer secretly controlled by CEO and CFO

The special committee identified that Global Equipment Solutions, one of the company’s vendors in 2015 and 2016, was actually formed by Brent Whiteley and controlled by Mr Whiteley and/or Mr Hastings. The company paid $12 million to this entity in these two years.  $5.9 million of this ended up being a capital contribution to a company called ASV. The company had originally recorded third party revenue from ASV in 2015 and 2016 of $84 million and $57 million respectively.

In the original 10-k filing, nearly all of that revenue from ASV in 2016 was still outstanding as a receivable in 2018. There was also a convoluted explanation about how the customer – ASV wasn’t named in the 2018 financial statements – was going to pay SAEX using monetization of exploration tax credits from the state of Alaska. That got the attention of the SEC. In the restated financials, this receivable was written off and ASV has been consolidated as a variable interest entity.

Consulting firm secretly controlled by CFO

Furthermore, from 2012 to 2019, payments of $4.1 million were made to a company called RVI Consulting. This was secretly controlled by Mr Whiteley. The payments were originally recorded as legal and professional expenses.

The special committee also identified the misappropriation of $0.5 million in 2013 in relation to the reimbursement of the individual tax liability of Mr Hastings.

In total, the amount of funds that the company states was misappropriated was $16.6 million ($12+$4.1+$0.5 million).

The company fired Mr Whiteley in August 2019. It suspended Mr Hastings on the same day and terminated him in November 2019.

The aftermath

The company has spent $6.9 million in legal and professional fees in relation to the SEC investigation in the nine months ended September 30, 2019. For good measure, the Alaskan Department of Revenue is also conducting an investigation into the issuance of tax credits and may impose its own sanctions.

The company has been selling off assets to try and improve its financial situation. In November it sold its assets in Australia for $9 million. In January, 2020 it sold certain seismic data assets for $15 million plus a possible earnout of $5 million.

At September 2019, the company had debt of $119 million and negative equity of $31 million.

https://www.sec.gov/Archives/edgar/data/1514732/000156459020003869/0001564590-20-003869-index.htm