So I go to bed Thursday evening after this report from Briefing.com concerning Chicago Bridge and Iron's (CBI) 2nd quarter performance:
"Reports Q2 (Jun) earnings of $1.36 per share, excluding non-recurring items, $0.08 better than the Capital IQ Consensus Estimate of $1.28; revenues rose 15.6% year/year to $3.29 bln vs the $3.25 bln consensus. Second quarter new awards totaled $4.2 billion, which resulted in a backlog of $31.5 billion.
Then I check Friday's closing price for CBI and discover that it closed 9% lower, perhaps due to this comment reported by Street Insider:
"Prescience Point made negative comments on Chicago Bridge & Iron (NYSE: CBI) via twitter after the company reported Q2 results and guidance. CBI also filed its 10-Q earlier. Prescience Point said the disconnect between earnings and cash flow is widening. It also noted management evaded questions on its accounting issues during the call. Previously, Prescience Point accused Chicago Bridge & Iron of accounting shenanigans."
Say what? According to Yahoo.Finance, fourteen out of twenty analysts rate CBI as a strong buy or buy, four a hold, and two an underperform. And 2nd quarter performance beat expectations. What's going on that one twitter message could send CBI's stock price tumbling? So, I decided to investigate.
It seems to me that the damning phrase in the twitter message was this: "the disconnect between earnings and cash flow is widening."
I presume the twitterer was referring to this data taken directly from CBI's 10Q for 2nd quarter 2014 (all figures in thousands):
Six Months Ended
Net Income $ 269,812 $ 162,572
Net Cash Flow from Operations (374,363) (300,742)
Net income increases while cash flow from operations gets worse. The guilty line item in the cash flow statement was this:
Six Months Ended
Changes in Contracts in Progress, net $ (797,126) $ (221,071)
Delving further and using the information reported on page 9 of CBI's 10Q, I found that the decrease of $797,126 was due to the following netting out of balance sheet items:
Cost and Estimated Earnings in Excess of Billings
$ 661,676 $ 566,718
Billings in Excess of Costs and Estimated Earnings
- 2,018,083 - 2,720,251
Contracts in Progress, net $ 1,356,407 $ 2,153,533
Change in Contracts in Progress, net (6 mths 2014 $ (797,126)
The take away from the above numbers is that some projects (the first line) have billed less than would be supported by the percentage of completion accounting method used by CBI and that some projects (the 2nd line) have billed more than would be supported by the percentage of completion. For the current six month period the billings in excess of costs and estimated earnings have been reduced down to $2,018,083, a decrease of $702,168.
Is this drop a good thing or a bad thing? Apparently those who sold CBI on Friday must have thought it was a bad thing.
I think it was a good thing. Here's why.
For me, the excessive shrinkage in billings in excess of costs and estimated earnings shows that CBI's management has attempted to bring billing in line with true percentage of completion by corralling the activity of billing more than what would ordinarily be owed. The fact that it got out of line may have been due to past CBI's past practices or it may have been due to past Shaw Group's practices. (CBI acquired Shaw Group in 2013. The acquisition was reported as a purchase; hence an independent appraisal valued Shaw Group's assets and liabilities at fair market value. Shaw Group's revalued assets and liabilities were then combined with CBI's.) I don't know and can't opine, but I do know that there can be a plethora of reasons why the imbalance could have arisen, for example: management philosophies may differ, circumstances may differ, and/or contractual obligations may differ.
The bottom line is that it appears that CBI management is attempting to align billing practice to the realities of the situation and this is praiseworthy --- not worthy of the contempt shown by a 9% one-day sell-off!
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Disclosure: The author is long CBI.