Today the company made a repetitive press release that has me reading between the lines. Here is the guts of the release:
[The company] today announced that the Audit Committee of its Board of Directors has substantially completed its investigation of the Company's accounting for certain crop payments to walnut growers. The Audit Committee has concluded that the Company's financial statements for the fiscal years 2010 and 2011 will need to be restated. Over the course of the last three months, the Audit Committee has carefully reviewed the accounting treatment of certain payments to walnut growers. The Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and the Audit Committee identified material weaknesses in the Company's internal control over financial reporting.
The Board of Directors is taking a number of corrective actions including the appointment of a new Chief Executive Officer and Chief Financial Officer. Effective immediately, the Board has appointed Director Rick Wolford to serve as Acting President and Chief Executive Officer and Michael Murphy, of Alix Partners, LLP, to serve as Acting Chief Financial Officer. The Company is commencing searches for permanent replacements for the CEO and CFO positions. The Board has also appointed Robert J. Zollars, who previously served as Lead Independent Director, to the position of Chairman of the Board. Michael J. Mendes and Steven M. Neil have been placed on administrative leave from the Company.I have read the whole release - but there is no additional information.
I know relatively little about this company - indeed I did not bother looking because the short was crowded and the product (Kettle chips and walnuts) seemed OK. But this release had me puzzled.
The offence as described - moving $20 million of expense from one year to another in one year and $60 million in another year seems relatively minor. But the sacking of the CEO and CFO and the appointment of Alix Partners seemed less minor.
Still timing offences (and they admit timing offences) must be measured relative to earnings.
The last 10K (since amended and now withdrawn) shows nicely growing income in excess of $50 million.
$26 million in net income and about $50 million in the next year. If you were to add $20 million of expense to 2010 and $40 million (the net amount moved) to 2011 and tax-effect those amounts the profits drop from a net $26 million to $14 million for 2010 and $50 million to $22 million for 2011.
That is pretty nasty. But not terminal. Still there are 21 million shares outstanding and at the after-market price ($21 down 42 percent) that is still 20 times earnings.
It does not look like a salivating buy at 20 times. Not close.
And the loss of the CEO and CFO does matter. There is seldom only one cockroach.
The thing that gets me though is the appointment of the new CFO. Michael Murphy is from Alix Partners and his CV makes it very clear that he specializes in restructuring debt. Alix do a lot of bankruptcy work (though that is not the only thing they do).
The last balance sheet (also since withdrawn) is amusing.
It shows cash of just over $3 million, some short term debt and long term obligations of nearly half a billion dollars. And - given the restatement - we can guess this thing only earns just over $20 million a year - and even that presumes the absence of further cockroaches.
I shorted some in the after-market. Don't do that often - but am quite pleased with myself.