Earnings Quality

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Earnings Quality
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Earnings Quality
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Earnings Quality

• Persistent/permanent earnings
• Transitory earnings

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Comprehensive Income
FASB Concept Statement 6 The change in equity
from non-owner transactions. This must be
reported in addition to Net Income.

• Includes Net Income plus other items not
  ordinarily included in Net Income
• Foreign currency translation adjustment, net of
  tax
• Unrealized gains(losses) on investment
  securities, net of tax
• Minimum pension liability adjustment, net of tax

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• GAAP EARNINGS?
• PRO-FORMA EARNINGS?
• CORE EARNINGS?
• WHAT ARE THE REAL EARNINGS? -)

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SP Article on Core Earnings
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(No Transcript)
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Restructuring Charges
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3 Com. Example
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Cisco Application Case 4-4
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(No Transcript)
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Cisco Spreadsheet
Cisco offered the following reconciliation ( in
millions) GAAP loss (2,693) Add
Restructuring costs and other special
charges 1,170 In-process research and
development 109 Amortization of goodwill
and other acquisition costs 346
Payroll tax on stock options exercised
10 Inventory charges 2,249 Total
adjustments 3,884 Tax effects
(approximately 24.7 tax rate) 961 Net of tax
adjustments 2,923 Pro forma net income
230 New accounting standards discussed in
Chapters 10 and 11 require that goodwill no
longer be amortized. This standard became
effective after August of 2001.
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Consider First Data, a payment-services provider
in Greenwood Village, CO. In the headline of its
third-quarter earnings release, issued Oct. 8,
the company stated "First Data Reports 19
Percent Growth in Earnings per Share. Company
Delivers Earnings per Share of 0.69." Further
down in the release, First Data tweaked that
somewhat, explaining that "EPS from continuing
operations were up 19," compared with
year-earlier results. Based on these statistics,
the company said the quarter marked "the
company's tenth consecutive quarter of
double-digit EPS growth."
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In fact, under GAAP, First Data's actual
third-quarter per-share earnings -- 38 cents a
share, based on net income of 151.2 million --
were down 51 from a year earlier, on both a
bottom-line and a continuing-operations basis.
That percentage decline is something the
company didn't mention in the text of its
earnings release but divulged only in a series of
financial tables at the release's end. The text
did mention the 38-cent figure, calling it
"Reported EPS," but left out the year-earlier
results, which also could be found in the
financial tables.
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First Data's release marks a new twist in the
growing controversy over "pro forma"
profitability measures, which are calculated "as
if" certain ordinary items -- usually expenses --
didn't exist. Normally, companies label these
nonstandard profit measures with non-GAAP terms
like "pro forma earnings," "cash earnings" or
"operating earnings." First Data stands apart
because it used GAAP terminology like "earnings
per share" and earnings "from continuing
operations" to label what actually were pro forma
results.
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The International Paper Company lost 313
million in the second quarter, citing a weak
economy, the strong dollar and costs related to
closings and a merger. The company, based in
Stamford, CT, reported a loss of 65 cents a share
for the April-through-June quarter. It had a
profit of 270 million, or 64 cents a share, in
the period a year earlier. Before special and
extraordinary items, earnings were 64 million,
or 13 cents a share. Analysts estimated a profit
of 5 cents a share. Second-quarter sales were
6.7 billion, down from 6.8 billion a year ago.
The company has announced 4,000 job cuts since
April. Special items included charges for closing
installations, 465 million before taxes for
severance and 32 million in pretax costs for the
acquisition of Champion International in
Stamford. The shares rose 77 cents, to 39.
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The results for Bank of New York Co., which
suffered relatively severe disruptions in the
aftermath of Sept. 11, brought to the forefront
the debate over how to analyze results produced
against a backdrop of undeniably extreme
circumstances. Bank of New York's profits fell
33 from a year earlier, to 243 million. A
combination of lost revenues and higher costs
associated with the disaster clipped 140 million
from third-quarter earnings, 15 million more
than it had estimated at the end of September.
Earnings per share of 33 cents fell 18 cents
short of the analysts' consensus.
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But Bank of New York said normalized profits
-- results excluding the terror attack's impact
-- would have been up 5.5 from the same period
last year. "Normalized" per-share earnings would
have been 52 cents, a penny above
expectations. The adjusted numbers were given
despite a statement last month from the Financial
Accounting Standards Board that the attacks could
not be considered extraordinary when accounting
for quarterly results. A Bank of New York
spokesman said Thursday that the data were meant
to help investors understand how the company was
functioning on an ongoing basis.
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"We're not buying it," said Michael Mayo, an
analyst at Prudential Securities, who put a
"sell" rating on Bank of New York shares this
year. "They are trying to show that the core
momentum is not as bad as it would appear," but
core processing revenues have shown their biggest
decline in nearly a decade, he said. The
company's stock lost one-third of its value from
Jan. 1 through Sept. 10, reflecting market
sentiment that Bank of New York's core
businesses, securities processing and custody,
were slowing. It closed Thursday at 33.90 a
share, down 2.22.
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On July 19, Nortel Networks, the Canadian telecom
giant disclosed a "pro forma net loss from
continuing operations" of 1.55 billion (48 cents
per share). That's the number analysts used and
the one reported by earnings- tracker Thomson
Financial/First Call, whose numbers are widely
circulated in the financial community. Nortel's
actual net loss was monstrously bigger -- 19.43
billion (6.08). The difference -- nearly 18
billion -- included a 12.3 billion after-tax
charge for the write-down of intangible assets,
plus a loss from discontinued operations,
acquisition-related costs, stock- option
compensation from acquisitions and divestitures,
and one-time gains and charges.