Sunbeam and "Chainsaw Al"
Questions regarding "Chainsaw Al’s" accounting practices
Dunlap accomplished what he set out to do at Sunbeam, but the shareholder wealth did not last. Nor did the board’s satisfaction. Sunbeam is again facing rough times, but not because costs are too high or lack of strategy. The three purchases that more than doubled Sunbeam’s size and helped push its price per share to $52 soon caused upheaval and restructuring Sunbeam a second time. Soon after the purchases, rumors began emerging that the three purchases were made to disguise losses through write-offs.
Paine Webber Inc. analyst Andrew Shore had been following Sunbeam since the day Dunlap was hired. As an analyst, Shore’s job was to make educated guesses about investing clients’ money in stocks. Shore had been scrutinizing Sunbeam’s financial statements every quarter and considered its reported levels of inventory for certain items to be high for the time of year. He noted massive increases in sales of electric blankets in the third quarter, which usually sell well in the fourth quarter. He also found it odd that sales of grills were high in the fourth quarter, an unusual time of year for grills to be sold, and noted that accounts receivable were high. On April 3, 1998, hours before Sunbeam announced a first quarter loss of $44.6 million, Shore downgraded the stock. By the end of the day Sunbeam’s stock price fell 25 percent.
Shore’s findings were indeed cause for concern regarding the price of the stock. In fact, Dunlap had been using a "bill and hold" strategy with retailers, which boosted Sunbeam’s revenue, at least on the balance sheet. A "bill and hold" strategy involves selling products for large discounts to retailers and holding them in third-party warehouses to be delivered at a later date. In essence, the strategy shifts sales from future quarters to the current one. By booking sales months prior to the actual shipment or billing, Sunbeam was able to report higher revenues in the form of accounts receivable, which inflated its quarterly earnings. In 1997, the strategy helped Dunlap boost Sunbeam’s revenues by 18 percent. A "bill and hold" strategy is not illegal and follows the General Accepted Accounting Principals (GAAP) of financial reporting.
Even though the "bill and hold" strategy is not illegal, many shareholders felt the company had deceived them so they would purchase Sunbeam’s artificially inflated stock. Several decided to file lawsuits alleging that the company made misleading statements about its finances. A class- action lawsuit was filed on April 23, 1998, naming both Sunbeam and its CEO as defendants. The lawsuit alleged that Sunbeam and Dunlap violated federal securities laws by misrepresenting and/or omitting material information concerning the business operations, sales, and sales trends of the company. The lawsuit also charged that the motivation to artificially inflate the price of the common stock was so Sunbeam could complete hundreds of millions of dollars of debt financing to complete the mergers with Coleman, First Alert, and Signature Brands. Sunbeam’s subsequent reporting of earnings significantly below the original estimate caused a huge drop in the stock. A Web site provided information about the lawsuits and financial damage to stockholders due to the alleged deception.
Dunlap continued to run Sunbeam and the newly purchased companies as if nothing had happened. On May 11, 1998, Dunlap tried to reassure 200 major investors and Wall Street analysts that the first quarter loss was behind them and that Sunbeam would post increased earnings in the second quarter. That same day he tried to gain back confidence and divert the attention away from the losses and lawsuits by announcing another 5,100 layoffs at Sunbeam and the acquired companies. The tactic did not work. The press continued to report on the "bill and hold" strategy and accounting practices Dunlap used to artificially inflate revenues and profits.