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Multifoods Demonstrates How Optimistic Y2K Disclosures Do Not Always Portray Reality

By Michael S. Robbins November 18, 1999

Last month, International Multifoods Corp. (NYSE:IMC) filed a 10Q with a boilerplate type Year 2000 disclosure. Most of the disclosure insinuated everything was okay, but gave a brief disclaimer at the bottom that the project may be delayed or that a non-compliant business partner could create problems for Multifoods. The Company did not warn that installing a new Y2K compliant system would create massive distribution problems. On Nov. 11, news that problems associated with the computer upgrade would affect this quarter's earnings slammed the stock down over 20 percent.

New earnings estimates for the company's fiscal 2000 third quarter ending Nov. 30, 1999, were about 25 percent lower than analysts' consensus's estimated. The stock fell so rapidly that orders became delayed and trading was temporarily halted. Investors in Multifoods lost about $112 million from the crash.

It is not the first time technical problems have created earnings trouble for a company, but it is likely that Multifoods would not have had this difficulty if it was not facing such a strict deadline.

Multifoods initially reported the primary factor affecting results was a continuation of higher-than-anticipated costs in its foodservice distribution business. The Company only described the issue as being related to issues associated with the implementation of a common information system, and the company's plan to consolidate and expand its national network of distribution centers. The Company said these actions resulted in higher delivery-and-distribution costs.

It may have avoided connecting the problems to Y2K in the initial press release because Y2K is such a high-profile issue, requiring elaborate Year 2000 disclosures in filings with the SEC. The Company sited cheese prices as being a secondary issue causing an earnings shortfall. The news was announced at 6:03 AM, but it wasn't until a Reuters interview at 5:27 PM when it was revealed that the computer upgrade was an aid to achieve Y2K compliance.

The following is a snip from Reuters: INTERVIEW - Multifoods dealing with computer woes

By Emily Kaiser

CHICAGO, Nov 11 (Reuters) - Food distributor International Multifoods Corp. (NYSE:IMC - news) thought it had addressed Year 2000 computer problems when it installed a Y2K-compliant computer system in its food service distribution operations.

But it discovered problems that had nothing to do with older computers mistaking the year 2000 for 1900, and that led to a profit warning issued on Thursday.

The computer system, which was previously used in the company's vending business, used different words to describe orders.

Customers who placed orders did not always get the food they requested, because Multifoods employees either entered the orders incorrectly or misinterpreted data when filling orders.

Costley said International Multifoods replaced the computer system in its food service distribution business with the one used in its vending operation because it was Y2K compliant.

"Two years ago, that looked like a very smart move," he said. "In hindsight, we underestimated the complexity of having a vending system run a distribution system. In vending, the word 'each' means a case. In food service, 'each' means one."

So, when workers typed the orders into the computer or packed the food for delivery, employees who had worked on the vending side thought "each" meant a case, while food service workers thought it meant one.

"Customers would order a case of ketchup and get a bottle, or order a bottle and get a case," Costley said.

Costley said the "each" problem was just one example of the types of snags the food service business encountered when it switched computer systems.

Costley said the company expected costs to normalize by the middle of next year.

-- End Snip--

Seven-and-a-half months to normalize earnings seems to indicate Y2K could be more than a three day storm. The analogy has been used by government officials to describe Y2K as something that can generally be handled in a few days. In some cases, Y2K glitches can be handled that quickly. But when Millennium Bugs are all going off relatively simultaneously, it may be more challenging than expected.

There have been fewer examples of these types of incidents than some have expected. The fact this involves a U.S. company is of special interest because U.S. companies have been said to be much further ahead than their foreign counterparts. Was Multifoods just a fluke, or a sign that these less prepared foreign counterparts are not doing nearly enough work and are going to try to fix it on the fly? Multifoods said it has been working on Y2K for two years.

On that dreaded Thursday, US Bancorp Piper Jaffray cut its price target for Multifoods to $28 from $32. The stock flattened out at $15, down from $20 per share. The stock was downgraded to a "buy" from a "strong buy"; so if you liked it at $20, you have to love it at $15. However, this is a clear example how Wall Street analysts were completely unable to predict the problem. Obviously the complexity of Y2K was not discounted in Multifoods when the stock was $20. Many Wall Street analysts have said that the market has already discounted Y2K, but in the case of Multifoods, there were internal risks Wall Street did not understand until the company made the announcement.

-- Reader (Prudent@BearWatcher7.com), November 21, 1999

Answers

I worked for a company that wouldn't get its act together on Y2K. Now there are no programmers or analysts (including management) that have been with that company for two years. A group of eight people at three levels all went to another company over a period of six months.

-- Slobby Don (slobbydon@hotmail.com), November 21, 1999.

My company has its Y2K act together. Probably be some spreadsheets screw up somewhere. Fortune 500 IT company. Of course some customers havn't funded ....

-- ng (cantprovideemail@none.com), November 22, 1999.