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Commentary > Bid and Ask
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Earnings without the bad stuff
Once again companies are relying on 'pro forma' results to make their numbers.
October 21, 2003: 5:01 PM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Thought companies' dependence on funny numbers was long gone? In the spirit of Halloween, the use of pro forma earnings is staging a return from the grave that even Michael Myers would be proud of.

After just a couple of quarters of good behavior, companies are once again asking analysts and investors to ignore certain expenses on the grounds that they are one-time charges -- events that are so far out of the bounds of their normal business environment that they'll probably never, ever happen again.

Forget about that money we sank into research and development on that one product area -- it didn't pan out. Forget about the costs we incurred when we mothballed that plant, or when we fired those people.

The problem is that a lot of these supposedly non-recurring charges are for stuff that a private business owner would think of as normal, though unfortunate, costs of doing business. It's only public companies that seem to think that they're not ordinary events.

So you get things like Motorola asking investors to ignore a severance charge against third-quarter earnings -- even though it took severance charges in the first and second quarters of last year as well. Siebel Systems took a "restructuring charge" in the third quarter. It took similar charges in the third and fourth quarters last year, too. Novellus had its third restructuring charge in three years. Maybe one time means one time a year?

"Pro forma has hardly gone away," said Julius Baer head of U.S. equities Brett Gallagher. "Companies are essentially trying to bury stuff, to tell people not to look at the man behind the curtain."

The clearest way to see the extent that companies are playing the pro forma game is to look at how the S&P 500 operating earnings compare to earnings under generally accepted accounting principles, or GAAP. When things were really out of hand last year, operating earnings were coming in more than double GAAP earnings. And in the fourth-quarter, when there were write-offs galore, operating earnings were four times GAAP.

As things improved in the first half of this year, companies' reliance on pro forma faded and operating earnings and GAAP fell closer in line.

But in the third quarter, according to Howard Silverblatt, editor of quantitative services at Standard & Poor's, it looks like the difference between GAAP and operating earnings is going to be back up around 20 percent.

"That's at the fringe end of respectability," he said. A more "normal" difference between GAAP and operating earnings (they're never going to be the same) is probably something like 15 percent.

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Bid and Ask
Written by: Justin Lahart

What's more, the write-offs will probably get even worse in the fourth quarter, when companies tend to kitchen-sink it in an effort to start the new year with a clean slate. Silverblatt says it won't be anywhere as bad as last year.

But not as bad isn't the same thing as saying good.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.