Have reporters been reading Lawrence Kam's posts, and writing their articles, without giving full credit where credit is due?
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nytimes.com
June 7, 1998
For Better Earnings, Try Bigger Write-Offs
By GRETCHEN MORGENSON
NEW YORK -- While the stock market ended last week on a high
note, pleased with the mix of economic reports, one little-noted piece
of data had ominous implications for investors.
Corporate write-offs, as a percentage of the reported earnings per share of
the Standard & Poor's 500-stock index, surged in the first quarter to 14
percent. Of the $10.25 a share that the S&P 500 companies reported in
earnings for the quarter, write-offs totaled $1.44 a share.
This is more than just a blip. Gabrielle Napolitano, vice president for
investment research at Goldman, Sachs, has collected such data for 10
years. She says write-offs have never been higher than they are now.
This is unusual given that we are in an economic boom. Some of the
write-offs are a result of mergers, in which companies deduct acquisition
charges. The Asian crisis is another factor: 35 percent of the first quarter's
write-offs related to commercial banks' loan-loss provisions.
But an alarmingly large chunk of the write-offs -- 15.3 percent -- were
nonrecurring charges related to the purchase of so-called in-process
research and development. That was up 70 percent over last year.
Why alarming? The rise may indicate that increasing numbers of companies
are using an arcane accounting rule to artificially bolster their earnings.
Whenever one company acquires another, some of the assets are of little
value to the combined companies. That is especially true for technology or
pharmaceutical concerns.
Accounting rules allow the acquiring company to write off immediately
against earnings the total value of the in-process R&D that its management
considers worthless. It is a nonrecurring charge.
Why should this matter to an investor? Because it affects a company's
earnings. Since the one-time charge reduces the value of the acquired
assets, it also lowers depreciation expense in future years. And depreciation
charges shrink earnings.
So when a company takes a one-time write-off for purchased R&D, future
earnings look better than they would have had the company depreciated
those assets over time. And if the assets turn out to be not so worthless
after all, any income they produce drops straight to the bottom line,
unimpeded by depreciation expense.
Howard M. Schilit, president of the Center for Financial Research and
Analysis in Rockville, Md., notes that these write-offs not only are much
more prevalent today, but that they now amount to big money. "We're
seeing a lot of companies that put absurd amounts -- even 95 percent of the
purchase price of an acquisition -- into in-process R&D write-offs," he said.
Consider the peculiar case of Applied Materials Inc., a formerly high-flying
maker of semiconductor equipment. In the quarter ending in January, it paid
$32.2 million to a company in a licensing agreement.
Rather than consider the fee an operating expense, as Schilit said would be
typical, Applied Materials called it in-process R&D, even though no
acquisition had transpired. That accounting improved the company's
operating cash flow by 26 percent.
"Companies do more of these things when their business weakens," Schilit
said. "If things are humming, they don't need to reach." The company was
closed Friday and did not return a phone message seeking comment.
Indeed, in the same quarter, the company's margins fell significantly. In the
April quarter, sales dropped 10 percent.
Copyright 1998 The New York Times Company
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PS: If Lawrence Kam wrote it first, does he get to share in the copyright?
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