Central European Distribution Corp. (NASDAQ:CEDC)'s management announced that they expect to restate their financial results since January 1, 2010, in the latest chapter of an ongoing effort to correct the Polish vodka maker's documents. Investors could have noticed signs of blurry vision in the company's statements years ago.
CEO William Carey and his team have slashed their earlier sales forecasts around five times since March 2010, explaining that they grapple with challenges such as accurately predicting the foreign currency exchange rate. They've also pushed into the Russian market in recent years. For example, CEDC began investing in the Russian Alcohol Group in a complex deal in 2008 that led to its acquiring control of the Moscow-based vodka maker in June 2010.
When CEDC reviewed Russian Alcohol Group's business operations, it found that sales in the years ended December 31, 2010 and 2011 "failed to reflect the timely reporting of the full amount of retroactive trade rebates provided to RAG's customers in Russia," according to a press release Monday. It estimated a reduction to net sales, operating profit and related accounts receivable from January 1, 2010 through December 31, 2011 between around $30 million and $40 million, subject to change as the company continues its review. It is also looking at its statements for the year ended December 31, 2009.
CEDC had warned in its annual regulatory filing this February about problems in its financial reporting, but there were earlier indications that somebody on the team might have been drinking vodka. For example, they reported that their clients owed $478.4 million in as yet unpaid for goods in the year ended Dec. 2010, or 67% of CEDC's total sales. The proportion had spiked compared to the year ended in December 2008, when CEDC said its $430.7 million in receivables amounted to 26% of its total revenue.
In another warning sign, investors filed a class action lawsuit in New Jersey District Court in October 2011, alleging that CEDC's CEO Carey and CFO Christopher Biedermann spoke positively about the company's future prospects without having any reasonable basis. Among other things, they alleged that the managers failed to tell investors that CEDC was losing business to rivals in Poland and that its launch of the mild white vodka Zubrowka Biala in November 2010 hurt profits. They also claimed the managers didn't downwardly revise their estimates about the value of two Polish brands on a timely basis.
CEDC said this February in its filing for 2011 that the class action complaint is "without merit." Carey and Biedermann remain in charge.
No matter what the court decides, CEDC's investors could fairly wish the company had better forecasting abilities. In the year ended Dec. 2009, CEDC said it had $2.26 billion in acquisitions that it felt merited more than book value and intangible assets such as brands - slightly more than half its total assets. Then in February this year, the company announced that it would have to revise its estimates downward after its Russian vodka business and Polish brands such as Bols Vodka failed to perform as well as expected. As a result CEDC's goodwill and intangible assets amounted to $1.13 billion as of the year ended December 31, 2011, but remained more than half of the company's total assets.
In part due to such red flags, CEDC's financial statements have reflected an AGR score of 1 or 2 in every quarter since September 2009, indicating more accounting and governance risk than the vast majority of comparable companies. That doesn't necessarily mean that CEDC has said anything false, but it does show that investors should have scrutinized the company's financial statements carefully before using them to evaluate their holdings or initiate a position. Back then, the stock traded at around $30 per share. It has plummeted since to $3.19 per share intra-day on Tuesday.
- Region: North America
- Industry: Non-Cyclical Consumer Goods / Services
- Sector: Beverages - Distillers / Wineries
- Market Cap: $ 318.5mm (Small Cap)
- ESG Rating: C
- AGR: Very Aggressive (1)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I work full-time for GMI as a corporate governance expert.