Posted by on September 22, 2020 4:15 am
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Categories: Accounting

How a software company used accounting gimmicks to turn a $500M loss into a $340M gain – Crain’s New York Business

How a software company used accounting gimmicks to turn a $500M loss into a $340M gain – Crain’s New York Business

The economy is a mess, and profits are under extreme pressure. Now comes the corporate spin to cast ugly results in the best possible light.

The glow is most radiant at Exela Technologies, a software company in Texas with $1.5 billion in annual revenue. It has run up a $500 million net loss in the past 12 months. Oh, but if you see things Exela’s way, it actually had a $340 million gain.

“Remarkable,” said Anthony Canale, global head of research at Covenant Review, a New York–based firm that spotted the difference. “It’s found money for Exela.”

Exela turned an ugly loss into a big, beautiful gain by taking a little something called EBITDA further than it has gone before.


EBITDA—the acronym stands for earnings before interest, taxes, depreciation and amortization—is widely used on Wall Street as a proxy for cash flow. Heavily leveraged companies cite EBITDA to try to demonstrate they are financially healthy, at least in some fashion.

But Exela gushes so much red ink that the standard EBITDA definition didn’t pretty up its results enough. The company applied it and still showed a $230 million loss. 

So management excluded a bunch of other pesky business costs, starting with $350 million in “goodwill impairment expenses,” which reflect how much was overpaid buying other companies. Exela also excluded $56 million in “optimization and restructuring expenses” and $139 million in “combined merger adjustments,” which the company said include “both stand-alone and combination synergies.”

Confused? Canale is too, and he is a former private-equity lawyer.

“I don’t know what optimization expenses are,” he said. “I’m not sure what stand-alone or combination synergies are.”

Exela describes its little masterpiece as “further adjusted EBITDA.” Canale called it “EBITDA on steroids.” Whatever the name, it’s how you turn a big loss into a big gain. Try it some time.

Why did Exela bother with such extreme contortions? Shareholders aren’t fooled; the company’s stock trades for only 40 cents per share.

The key audience is creditors, who just might swallow Exela’s prettified version of results, Canale said. To understand why, you need to know a bit about the junk bond market.

In the past 15 years, power has shifted, and needy enterprises seeking to borrow have bargaining power over junk-bond investors. The Federal Reserve has kept interest rates low for a long time, and debt offering genuinely high yields has grown rare-gotten, so buyers must accept lower returns and looser covenants. Over time junk-bond investors have yielded a lot of rights, and depending on what was written in the offering memo, that could mean a struggling company is free to cook up further adjusted EBITDA.

For what it’s worth, an Exela spokesman said the company is no longer using the magical phrase is in its earnings terminology.

Canale said the company deserves praise for disclosing how it likes to see its financial results, because companies generally aren’t so forthcoming. He added that investors can stop the creative accounting by refusing to buy debt from companies with truly absurd definitions of earnings. But with interest rates to stay low for a longer time, why would they do that?

We are in a golden age of accounting games, the first in 20 years, since giants such as Enron, HealthSouth and WorldCom stalked the earth. Before it all ends with regrets, we might want to applaud the derring-do of the intrepid enterprises taking EBITDA places it has never gone before.


Published at Mon, 21 Sep 2020 18:43:27 +0000

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