CP Ships apologizes for accounting errors, reports profit downturn
CP Ships chairman Ray Miles apologized to investors during a conference call Monday for overstating company profits in 2002 and 2003, as the company gave them the additional bad news that second-quarter net income dropped to $3 million from a restated $23 million in the same period of 2003.
“We feel ourselves that we have let down our investors and let down ourselves,” Miles told investment analysts during the call. “This has certainly been CP Ships’ most challenging quarter since we were publicly listed.”
CP Ships, whose stock price fell 22 percent Aug. 9 after announcing it had overstated its profits, said the cumulative effect of all restatements of its accounts is $41 million, of which $8 million was already announced and included in the company’s first-quarter results.
The Canadian-registered company now faces multiple class actions in court from law firms representing investors that allege it misrepresented its accounts. Commenting on the litigation, CP Ships said: “We are aware that certain security holder class action lawsuits have been filed against the company and officers. We have not been served with copies of the complaints in any of these lawsuits.”
The company confirmed restatements of financial results previously announced, citing delays in processing invoices and ill-judged estimates used in its accounts that occurred during the implementation of a new SAP financial accounting system.
To explain the accounting errors, CP Ships said it handles more than 2 million loaded TEUs and another 1 million TEUs of empty container movements a year. There are several components of cost to each movement of a container, such as inland transportation on truck, train or barge, and handling and storage of containers at ports and inland depots. The company therefore has to account “for many millions of individual cost components,” CP Ships said in a statement.
The container shipping company noted that some of these costs are not certain at the time the movement occurs and have to be estimated. “Estimates for costs are based on the detailed steps of a particular move and our knowledge of current or recent vendor costs,” it said. “Our vendors are located in many countries, and there is normally a lag in receiving actual cost information, in some cases up to several months.”
CP Ships introduced a new SAP financial accounting system in the majority of its business with effect from Jan. 1. CP Ships suggested that this strained the finance staff during this period, and led to delays in the transfer of cost-related information between the operations and finance functions, such that cost estimates were not updated quickly. There were also delays in processing cost data.
“These control issues occurred at a time when the pattern of our trading was changing with the commencement of new services, leading to a different cost profile,” CP Ships added. “It was also a time of higher-than-normal cost increases, such as fuel surcharges from truckers, exacerbated by a weakened U.S. dollar which increased our non-U.S. costs.”
The accounting errors concerned wrong accruals for costs as well as incorrect inter-company revenue balances. The company’s total amount of underaccruals relating to 2003 was $20 million. The amount relating to the first quarter of 2004 was $4 million.
Restated net income for 2003 is $53 million, down from $82 million originally reported. The corrected 2002 net income is $52 million instead of the previously announced $45 million.
Ian Webber, chief financial officer of CP Ships, said the SAP system will be implemented fully across the group by the first quarter of next year. He asserted that he was confident no further accounting problems would emerge during its implementation. The company also insisted that the implementation of SAP “is a major step forward in financial control.”
Miles described the second-quarter result of the company as “not a tremendous result.”
In the second quarter, unaudited operating income fell to $26 million from the restated $34 million in the second quarter of 2003, largely due to declining profits in the Atlantic trade, CP Ships’ largest trade. Operating income from the transatlantic dived to $8 million in the latest quarter from $20 million a year earlier.
CP Ships said its traffic volume including all trades was up 2 percent and average freight rates up 7 percent, but costs per TEU rose 11 percent on costly charter renewals and a weaker U.S. dollar.
The second quarter net income of $3 million also reflects a $9 million charge on a valuation of interest rate swap agreements.
In the transatlantic trade, CP Ships incurred higher costs in the second quarter and did not achieve rate increases in April, said Frank Halliwell, chief executive of the company. The company said it may withdraw some ships from the transatlantic, for which its operating results are “unsatisfactory.”
“Most of the lines on the transatlantic are not making money,” a company spokesman said.
For the first half of this year, CP Ships earned a net income of $6 million, as compared to a restated first-half loss of $2 million last year.
CP Ships also said it would expand the scope of its cost-cutting program to reach $50 million of savings.
Despite the poorer second-quarter results and the effect of the accounting errors, CP expects to raise its net income this year to a level higher than the uncorrected 2003 net income of $82 million, partly thanks to freight rate increases.
The CP Ships stock dropped 2 percent to $12.46 on the New York Stock Exchange yesterday.