August 11, 2022

Companies in Certain Industries Receive More Auditor Warnings About Survival

The number of U.S. public companies labeled with auditor warnings about the ability to stay afloat declined overall during the 12 months ended May 31, but they rose in certain industries hard hit by the pandemic, such as transportation, construction and energy.

These warnings, also called going-concern opinions, are published in the annual reports of public companies and refer to their likelihood to remain in business for the next 12 months. Businesses themselves also have to sound the alarm if they think they might not make it for another year.

Although a going-concern notice doesn’t always precede a company’s demise, it can foreshadow a bankruptcy filing or default.

Executives in the spring of 2020 rushed to preserve liquidity, often by slashing jobs, cutting costs, and halting dividends and share repurchases. Some industries—such as e-commerce, technology and food retail—managed to navigate lockdown orders and restrictions, while others, including airlines and oil companies, suffered big losses. Recurring losses, alongside issues such as negative cash flow and inability to pay suppliers, usually trigger going-concern opinions.

Rental-car company

Hertz Global Holdings Inc.,

restaurant and entertainment firm

Dave & Buster’s Entertainment Inc.

and cruise operator

Norwegian Cruise Line Holdings Ltd.

were among the companies that issued such notices last year. Hertz filed for bankruptcy about two weeks after disclosing a warning, but Dave & Buster’s and Norwegian didn’t. Truck startup

Lordstown Motors Corp.

earlier this month said it might not have enough cash to start production, which triggered a management reshuffle.

The percentage of these going-concern filings increased in three industry sectors, which are categorized based on codes some U.S. government agencies use: construction; finance, insurance and real estate; and transportation, communication, electric and gas. Going-concern opinions for these three segments rose to 10.7%, 8.3% and 13.5%, respectively, up 1.1, 1.8 and 0.3 percentage points compared with the prior-year period, according to data provider MyLogIQ.

Of a total of 5,891 listed companies, 18.8% received such warnings from their auditor in the past year, down from 21.3% in the prior-year period, MyLogIQ said. U.S. bankruptcy filings dropped 3.8% to 581 during that same period, compared with the previous 12 months, according to market research firm S&P Global Market Intelligence.

Renavotio Inc.,

a Tulsa, Okla., construction and utility-management company, in April 2021 received a going-concern notice from its auditor after it struggled to generate cash. Tenders for municipal-services work, such as replacing water and sewer lines, had dried up due to the pandemic, making it difficult for the company to win new business.

Renavotio is now considering raising capital through an equity offering, its chief executive and chief financial officer,

Billy Robinson,

said. “I forgot what it’s like to get a full night’s sleep,” Mr. Robinson said, adding that managing the business through the pandemic has been challenging.

Billy Robinson, chief executive and chief financial officer at Renavotio Inc.



Photo:

Shipman Photography

Auditors’ going-concern opinions are somewhat subjective and don’t always indicate a coming corporate collapse, said Allen Blay, an associate accounting professor at Florida State University.

Eastman Kodak Co.

received going-concern notices for years but didn’t fold. The imaging technology company, which filed for bankruptcy in 2012, got four such warnings over the past decade, filings show. The most recent one dates from 2019. Kodak declined to comment.

Assessing companies’ ability to survive has proven more difficult for auditors during the pandemic because of the uncertainty about the economic recovery, said Phillip Austin, a managing partner at professional-services firm BDO USA LLP. Auditors had to lean more on valuation specialists and industry experts to grasp companies’ circumstances, he said.

“What makes it hard is [if] you don’t know when this business will see its cash flow or its customers return,” Mr. Austin said.

Retail Ecommerce Ventures co-founders Alex Mehr, left, and Taino ‘Tai’ Lopez snapped up Stein Mart Inc.’s intellectual property.



Photo:

Retail Ecommerce Ventures

Going-concern filings also can mark the beginning of a new chapter for companies. Dave & Buster’s profits have improved in recent months and the company’s auditor didn’t mention a going-concern issue in its latest annual filing in March, CFO Scott Bowman said. Meanwhile, Hertz is in the process of exiting bankruptcy after a judge approved the company’s plan on June 10.

Stein Mart Inc., a Jacksonville, Fla., discount chain, in June 2020 got a going-concern warning as it struggled to pay its vendors and landlords and faced a liquidity crunch from temporary store closures. The company in August filed for bankruptcy and permanently closed all 279 stores in the U.S., which at the time had about 7,950 employees.

The company’s intellectual property was snapped up in November for $6 million by Retail Ecommerce Ventures LLC, or REV, a Miami-based online retailer. REV earlier this year relaunched the business as an entity that sells apparel online. The business, known as, Stein Mart Online Inc. , employs 30 people, a REV spokesman said.REV said it could take Stein Mart public again at a later point in time. For now, the company wants to expand the business. “To fix the brand, you must bring its soul and its energy back,” CEO

Alex Mehr

said.

When the coronavirus tore through industry, commerce and society in March 2020, the U.S. economy came to a screeching halt. Top executives relive the tough decisions they made as they scrambled to weather the storm. Photo Illustration: Adele Morgan/The Wall Street Journal

Write to Mark Maurer at [email protected]

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Related Posts

Transcript: WSJ Interview With Philadelphia Fed President Patrick Harker

July 1, 2021

July 1, 2021

Federal Reserve Bank of Philadelphia President Patrick Harker discussed in an interview with The Wall Street Journal his views on the...

Republican Senator Presses Regional Fed Banks on Race-Related Work

May 23, 2021

May 23, 2021

A Republican senator sent letters to three regional Federal Reserve bank leaders on Sunday seeking information about their recent work...

U.S. Initiates Trade Dispute Against Canadian Dairy Industry

May 25, 2021

May 25, 2021

The Biden administration initiated a dispute process against the Canadian dairy industry, triggering the formal dispute mechanism of the new...

The Clubby World of Venture Capital Finds a New Bet: Black Entrepreneurs

June 18, 2021

June 18, 2021

Austin Clements was ready to give up. He’d quit his job in venture capital in 2019 to try to launch...

Tribune Says Sale to Alden Wins Approval Amid Confusion Over Key Shareholder’s Vote

May 21, 2021

May 21, 2021

Tribune Publishing Co. said Friday that its shareholders voted to approve a takeover offer from Alden Global Capital LLC, amid...

Next-Generation GPS Firm NextNav Nears SPAC Deal to Go Public

June 10, 2021

June 10, 2021

NextNav Holdings LLC is nearing a combination with a special-purpose acquisition company that would take the next-generation GPS firm public...

Capital-Spending Surge Further Lifts Economic Recovery

June 27, 2021

June 27, 2021

Business investment is emerging as a powerful source of U.S. economic growth that will likely help sustain the recovery. Companies...

China’s New Power Play: More Control of Tech Companies’ Troves of Data

June 12, 2021

June 12, 2021

Shortly after rising to power in late 2012, Xi Jinping made his first company visit in his new job as...

J&J Covid-19 Vaccine Shows Promising Preliminary Signs of Protecting Against Delta Variant

July 2, 2021

July 2, 2021

Johnson & Johnson ’s Covid-19 vaccine showed promising signs in a small laboratory study of protecting against the Delta variant...

Jobs Are Hard to Fill, and Ideology Makes It Hard to Understand Why

June 30, 2021

June 30, 2021

Telling one story about why employers are struggling to hire workers doesn’t come close to explaining what is going on...

Facebook Critics Regroup in Bid to Reshape the Digital Behemoth

June 30, 2021

June 30, 2021

Critics of big tech firms cheered after prosecutors and lawmakers made moves against Facebook Inc. and its peers. Recent developments...

Teneo Says Declan Kelly Has Resigned as Chairman, CEO

June 29, 2021

June 29, 2021

The consulting firm said Declan Kelly has resigned as chairman and chief executive to protect employees and clients.

Fed Inching Toward Discussion of Slowing Bond Purchases

June 4, 2021

June 4, 2021

WASHINGTON—Friday’s jobs report keeps the Federal Reserve on track to begin informal internal discussions about reducing the pace of its...

Inflation in Rich Countries Hit a 12-Year High in April

June 2, 2021

June 2, 2021

Consumer prices across the rich world rose at the fastest pace in more than 12 years during April, as central...

Americans Face Higher Gas Prices Heading Into July 4th Weekend

July 2, 2021

July 2, 2021

Americans face the steepest gasoline prices in nearly seven years as tens of millions eagerly hit the road this summer...