DELL: Fully Reporting Soon After Restatements & Internal Investigation Results (DELL, HPQ)

Dell (NASDAQ:DELL) has decided to do something that is probably not coincidental.  It announced that it has completed its internal investigation and will restate its financials.  Any shot this was to take away some of the momentum or thunder from what would have otherwise been a Hewlett-Packard (NYSE:HPQ) focused day after its solid earnings?  That can’t be a coincidence, not one bit.

As a result of accounting errors and irregularities identified in that investigation and in additional reviews conducted by management, the Audit Committee has determined to restate the company’s financial statements relating to fiscal 2003, 2004, 2005 and 2006 (and interim periods) and the first quarter of fiscal 2007. Dell’s previously issued financial statements for those periods should no longer be relied upon.  Here is the result of the findings in summary:

• Net revenue for each annual period is expected to be reduced by less than 1 percent of the previously reported revenue for the period.
• The cumulative change to net income for the restatement period is expected to be a reduction of between $50 million and $150 million and the cumulative change to earnings per share  for the restatement period is expected to be a reduction of $0.02 to $0.07.
• The largest percentage changes in quarterly net income and EPS are expected to be in the first quarter of fiscal 2003 and the second quarter of fiscal 2004, each with expected reductions of between 10 percent and 13 percent; the fourth quarter of fiscal 2005, with an expected reduction of approximately 7 percent; and the second quarter of fiscal 2005 and the third and fourth quarters of fiscal 2006, each with an expected increase of approximately 5 percent to 7 percent. Net income and EPS for each of the other quarters are expected to change by 5 percent or less.
• The adjustments are not expected to have a material impact on the current balance sheet.  The adjustments are not expected to have a material impact on cash flows during the restatement period and are not expected to have a significant effect on the reported results of future operations.

If you read on through the company’s release, you’ll see that the company also found intential manipulation to attain certain financial targets.  It also found it did not maintain an effective control environment with adherence to GAAP standards.  CFO Don Carty has also issued several remedies it will take to fix the control issues and to eliminate this ahead.  Lastly, it addresses the ongoing SEC investigation.  The SEC’s investigation is ongoing, and there can be no assurance that there will not be additional issues or matters arising from that investigation.

All that really matters to us is that the wrong doings are not so bad that they will topple Michael Dell.  He came back and everything he telegraphed and that had been indicated before could have led anyone with a half brain or more to conclude that there were some pretty big manipulations inside the company.  As long as Michael Dell is not toppled, then this is the news we have finally all been waiting for.  The company will begin reporting again, and that is all we really care about.  This just fixes the rearview mirror.  The restatements are bad as all restatements are, but they don’t look so crucial that past analysis was anything that will topple it.  It is even possible that some will be given a pair of cuffs instead of a slap on wrist by the SEC, but this still gets the issue mostly behind and should be viewed with some relief as long as it has no effect on Michael.  The doomsday crowd will say this is horrible and they will point to the years of intentional misgivings, but longer-term PC and tech investors will say this is what the market has been waiting for and the company can finally spend all efforts focusing ahead rather than dealing with the past.  You can find Dell’s full release here on their IR site.

Jon C. Ogg
August 16, 2007

Jon Ogg can be reached at [email protected]; he is the publisher of the 24/7 Wall St. Special Situation Investing Newsletter and does not own securities in the companies he covers.